Asian Swaps Regulation

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In 2010, Singapore (Singapore Exchange Limited), China (Shanghai Clearing House), and India (Clearing Corporation of India) launched their own central counterparty clearing houses (CCPs) in order to regulate the derivatives market. Japan, Hong Kong, Korea, and Taiwan have created task forces to study setting up CCPs. [1][2]

Japan also passed a bill in May of 2010 that requires all derivatives with "significant" transaction value to be cleared through a CCP. In June 2011, the outgoing chief of the Securities and Futures Commission (SFC) called for the creation of a regional rating agency that stands up to names like Moody’s Investor Service and Standard & Poor’s in the U.S.[3]

The major institutions responsible for creating and enforcing swaps regulation in Asia are the Japanese Financial Services Agency (FSA), the China Securities Regulatory Commission (CSRC), and the Monetary Authority of Singapore (MAS).

Contents

Key Historical Events in Japan Swaps Regulation

  • June 15, 2009: The SEC and Japanese FSA hold the fifth meeting of the "FSA-SEC High-Level Dialogue" in Washington D.C.; the meetings topics included credit rating agencies, short selling and credit default swaps, accounting standards, disclosure, and enforcement issues[4]
  • July 3, 2009: Japan amends a bill to the Commodity Exchange Act, which regulates commodity derivative transactions traded on onshore commodity exchanges and OTC commodity derivative transactions that reference market prices on those exchanges; the amendment is an attempt to create seamless regulation between cross-border and domestic transaction, as well as exchange-traded and OTC transactions[5]
  • January 22, 2010: Japan's FSA Deputy Minister Kouhei Ohtsuka announced that it may require over-the-counter (OTC) derivatives transactions to go through overseas central counterparty clearing houses (CCPs)[6]
  • May 12, 2010: Japan's Parliament cleared a bill that requires a large portion of over-the-counter (OTC) derivatives trading to go through central counterparty clearing houses (CCPs); the bill will require the CCPs to be in use by late 2012[7]
  • June 29, 2010: The SEC and Japanese FSA hold the sixth meeting of the "FSA-SEC High-Level Dialogue" in Tokyo; the meetings topics included regulatory reform, enhancement of cooperation on enforcement and supervision, and developments surrounding accounting standards and auditing[8]
  • August 6, 2010: The Japanese government issued a proposal to combine trading commodity futures and financial derivatives through a single trading venue by 2013; the proposal calls for either a new exchange, partly capitalized by the state, or enabling existing exchange to offer both commodity and financial derivatives. The proposal has been accompanied by a wave of moves toward consolidation among Japanese exchanges[9]
  • December 7, 2010: The Japanese FSA drafted a plan detailing a number of planned changes set to be implemented sometime in 2011, these changes include reforms of international tax rules and a reforming of the tax treatment of OTC derivatives. The FSA has also encouraged firms to conduct their own studies detailing how they can improve confidence in public listing examinations, and says it will set up a conference to discuss the conclusions that the firms find[10]

Key Historical Events in Hong Kong Swaps Regulation

  • November 2, 2009: Hong Kong officials announced new measures designed to regulate the derivatives market; under the new regulations, banks must issue risk warnings for complex products and record conversations between their sales staff and clients to prevent deception. These regulations are a reaction to the collapse of Lehman Brothers, and the $1.8 billion that 30,000 Hong Kong small investors lost in Lehman-linked derivatives[11]
  • December 10, 2010: The Hong Kong Monetary Authority (HKMA) announced that it plans to set up a central registry that will require financial institutions in Hong Kong to report all of their over-the-counter derivatives transactions by the end of 2012; additionally, the Hong Kong Exchanges and Clearing Limited (HKEx) will start operations as a central counterparty clearing house (CCP) for OTC derivatives transactions[12]
  • January 5, 2011: Hong Kong announces that it will require all financial institutions that are incorporated in the territory to clear their interest rate swaps and non-deliverable forwards through a central counterparty clearing house, and report the transactions to a trade repository by the end of 2012[13]

Key Historical Events in Australia Swaps Regulation

Key Historical Events in South Korea Swaps Regulation

  • August 26, 2009: Financial Supervisory Service Governor Kim Jong-chang announced that South Korea may introduce an over-the-counter (OTC) derivatives central counterparty clearing house in order to create stability in the market. In the speech, Kim Jong-chang said: "With a clearing house, we can reduce risks arising from counter party’s settlement failures and mitigate operational risks by setting up a transaction registration place"[14]
  • June 9, 2010: The Korea Financial Investment Association’s OTC derivatives review committee now requires South Korean financial companies that want to introduce new types of OTC derivatives into the market to submit them for review by the committee before they are allowed in the market; this regulation is South Korea's attempt to cut risks and protect investors after the government was forced to spend 3.8 trillion won ($3 billion) since October 2008 to bail out exporters struck by losses tied to currency options[15]
  • January 11, 2011: Two South Korean financial authorities, the Financial Services Commission and the Financial Supervisory Service, issue a joint statement outlining new measures aimed at reducing stock-market volatility, one of the measures being a cap on institutional investors’ positions in the stock-derivatives market. These measures are a response to the steep drop in the Kospi 200 on November 11, 2010[16]

Key Historical Events in India Swaps Regulation

Key Historical Events in Singapore Swaps Regulation

  • November 15, 2010: The Singapore Exchange (SGX) begins offering central counterparty clearing services for certain over-the-counter (OTC) financial derivatives, making it the first such platform in Asia, and the exchange says that plans to continue to expand the products it offers in the future[17]

Key Historical Events in Taiwan Swaps Regulation

Key Historical Events in China Swaps Regulation

  • February 4, 2004: The China Securities Regulatory Commission announced China's first regulations on derivatives trading (The Interim Rules on Derivatives Business of Financial Institutions), which takes effect on March 1, 2004; up to this point, derivatives trading was performed mostly by foreign banks operating in China, and not by Chinese banks[18]
  • August 5, 2009: The China Banking Regulatory Commission released a notice titled Further Strengthening the Risk Management of Derivative Product Transactions between Banking Financial Institutions and Institutional Clients, which outlines a number of rules designed to limit risks and promote the healthy development of derivative trading in China[19]
  • November 5, 2010: After several years of deliberation, China finally launched its first credit risk mitigation agreements (CRMAs) - which are products similar to credit default swaps (CDSs) - in an effort to create a synthetic credit risk transfer market to help the nation's interbank bond and loan markets work better[20]

References

  1. Asian regulators launch reforms for OTC derivatives. Financial Times.com. Retrieved on January 11, 2011.
  2. FACTBOX - Asian moves to boost transparency in derivatives markets. Reuters. Retrieved on January 11, 2011.
  3. Industry chiefs call for Asian credit rating agency; ‘big three’ too ‘U.S.-centric’. Risk.net. Retrieved on June 13, 2011.
  4. FSA and U.S. SEC hold the fifth meeting of the High-Level Dialogue. Financial Services Agency. Retrieved on January 12, 2011.
  5. Japan: Commodity derivatives changed forever. IFLR. Retrieved on January 19, 2011.
  6. Japan May Push Derivatives to Overseas Clearinghouses. Bloomberg. Retrieved on January 12, 2011.
  7. Japan passes bill to tighten OTC derivatives rules. Reuters. Retrieved on January 12, 2011.
  8. SEC and Japan Financial Services Agency Hold Meeting of the SEC-JFSA Strategic Dialogue. Securities and Exchange Commission. Retrieved on January 11, 2011.
  9. Japan could unify financial and commodity derivatives by 2013. FOW. Retrieved on January 19, 2011.
  10. Japan plans major regulatory overhaul. GFS News. Retrieved on January 12, 2011.
  11. Hong Kong tightens regulation of derivatives sales. The Financial Express. Retrieved on January 19, 2011.
  12. OTC derivatives regulation to tighten. China Daily. Retrieved on January 12, 2011.
  13. Hong Kong lawmakers to enforce mandatory CCP by the end of 2012. Risk.net. Retrieved on January 12, 2011.
  14. South Korea mulls OTC derivatives clearing house. Reuters. Retrieved on January 19, 2011.
  15. South Korean OTC Derivatives to Be Reviewed Starting Next Week. Bloomberg Businessweek. Retrieved on January 19, 2011.
  16. South Korea To Tighten Derivatives Rules. The Wall Street Journal. Retrieved on January 19, 2011.
  17. SGX starts OTC derivatives clearing in Asia. Financial Times.com. Retrieved on January 12, 2011.
  18. Bankers hail derivatives transaction regulation. China Daily. Retrieved on January 12, 2011.
  19. Notice on Further Strengthening the Risk Management of Derivative Product Transactions between Banking Financial Institutions and Institutional Clients. China Banking Regulatory Commission. Retrieved on January 12, 2011.
  20. China embraces credit derivatives. Risk.net. Retrieved on January 12, 2011.

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