Australia’s central bank and other major financial regulators have recommended tightening regulation of the domestic over-the-counter (OTC) derivatives market.

The Australian Prudential Regulation Authority, the Australian Securities and Investments Commission and the Reserve Bank of Australia this week jointly released the Report on the Australian OTC Derivatives Market based on a survey of market participants.

Specifically, the report reviewed risk-management practices in the OTC derivatives market, examining how market participants are using centralised infrastructure, and the prospects for increased usage.

“It reiterates the regulators’ view that there are strong in-principle benefits from participants in the domestic OTC derivatives market making greater use of centralised infrastructure, such as trade repositories, central counterparties and trading platforms,” said an APRA statement. “The regulators recognise, however, that the suitability of using centralised infrastructure will not be the same for all products and participants.”

Three regulators, three recommendations

The three main recommendations of the report are that:

1. The Australian Government consider a broad-based mandatory trade-reporting obligation for OTC derivatives;

2. Central clearing of Australian dollar-denominated OTC interest-rate derivatives should be adopted by larger market participants and that this should be a mandatory obligation if the existing industry-led migration stalls;

3. There is scope for further improvements to operational and risk-management practices in relation to non-centrally cleared transactions.

The regulators said a wide-ranging survey of key participants in the Australian OTC derivatives market was undertaken during July 2012. The survey covered large domestic and international banking groups, smaller authorised deposit-taking institutions, fund managers, government borrowing authorities, corporate treasuries and electricity companies.

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