Global Correspondence

GFMA Submits Comments to Reserve Bank of Australia on Central Clearing of OTC Derivatives

The Global Foreign Exchange Division welcomes the opportunity to submit comments to the Reserve Bank of Australia regarding the OTC Derivatives Central Clearing Consultation Discussion Paper dated June 2011.

The discussion document seeks comment with regard to whether central clearing is appropriate for certain classes of derivatives. In respect of foreign exchange transactions, we have significant concerns about introducing any clearing requirement and welcome the Council agencies’ recognition that clearing may only be appropriate for certain, limited, FX products, namely options. Even with respect to options, we believe it is unclear whether the FX options market, given its size in Australia, poses sufficient systemic risk to justify implementation of a local CCP. We also agree with the Council agencies’ belief that products subject to a clearing mandate should, as much as possible, be harmonised with other jurisdictions’ requirements. This is particularly relevant given the global nature of the FX market and the level of trade conducted with off-shore market participants.

Ultimately, we believe that these transactions, and in particular FX forwards and swaps, should be excluded from the requirements of mandatory clearing. We believe the applicability of clearing to the FX options market requires further analysis, in terms of the structure of any CCP and the potential risk and liquidity requirements associated with it. The FX industry has been working with regulators, central banks and CCPs in the context of the CPSS IOSCO Principles for Financial Market infrastructures to understand the key challenges faced in clearing FX options in order to help inform market solutions in this regard.

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