Transcript of Question & Answer Session Panel participation at the Risk Australia 2018 Conference

My name's Sarah Harris I work for the Reserve Bank of Australia. My team is responsible for, amongst other things, supervision of Central Counterparties including the two ASX CCPs, LCH and CME. We're also involved in advising on ATC derivatives reforms both domestically and internationally and we're also in the process of trying to create a F&Y resolution regime at the moment.

Thank you, let's kick off proceedings. So being the regulator, I'll start the [unclear 00:00:37] have the G20 OTC derivatives reforms achieved their objectives and reduced risk by compelling systemically important counterparties to clear? This is especially in light of the report that's come out earlier this month.

So I think it's really too early to tell whether the G20 reforms are effective, they're not fully implemented globally although there's been a substantial amount of work that's been undertaken by governments, regulators and industry both here and in other parts of the world. In terms of the report recently the Financial Stability Board and a number of other standard sets of bodies put out a consultation paper really with the aim of examining the question of whether there are adequate incentives in place to encourage central clearing of OTC derivatives. Again, I'd really like to encourage the people who represent the firms in this room to respond to that consultation, it closes on the 13th of September and perhaps I can just quickly set out some of the preliminary findings in that report.

Firstly, unsurprisingly, there's been a substantial increase in the amount of central clearing, most notably in the interest rate and credit derivatives. Interestingly as an aside in Australia from the information that we have, Australian banks clear around 80% of their OTC interest rate swaps and they cleared very little ahead of 2012. One of the other findings is that taking together the reforms do provide an incentive to clear so that's whether it's margining or capital or clearing mandates. But that's really for the dealers and the larger clients.

Non-regulatory factors play a role so whether that's shifting liquidity or benefits in counterparty credit risk, netting efficiencies but really one of the interesting points that it sets out is that the incentives to clear may be weaker for smaller clients and that client clearing really is concentrated within that market. The only other comment that I'd probably make is that report, after the consultation process, is intended to come out at the end of the year so yep that's all I've got to say on that one.

Thank you. Sarah, what will Brexit mean for third country CCPs seeking recognition in the UK?

Sure so the first thing that I should probably say is both ASIC and the RBA is in close contact with the Bank of England in respect of our approaches to licensing. Now why is that relevant? Obviously where the two ASX CCPs are licensed under [unclear 00:03:49] to provide services to EU firms and they'll need to decide whether they apply for recognition in the UK. Similarly, there's a requirement in our Corporations Act if the home regime of a foreign CCP changes then we're required to refresh our equivalence assessment of that regime.

In terms of what non-UK CCPs actually need to do, well the ones that need to apply for recognition are any that provide clearing services to clearing participants or trading venues that are based in the UK or if they're used by market participants to satisfy mandatory clearing requirements that apply again in the UK or if they're deemed to be a qualifying CCP.

If there's a hard Brexit i.e. there's no transition that happens from late March next year the UK is intending to provide a temporary regime so that foreign CCPs could continue to provide services to UK participants and during that process they would then have to apply for formal recognition. If there is some kind of transition then effectively again the foreign CCPs would just have to apply for recognition with the Bank of England and they'd be given to the end of 2020 which is the kind of indication of what the transition period would be if it's not only agreed but implemented.

What does that mean in practise? Well hopefully it means that those CCPs who have a licence in Europe can effectively re-submit their applications that they used for ESMA, refreshing things a little bit hopefully. It also means that the regulators like ASIC and ourselves will similarly be working with the Bank of England to explain our regime and how that's equivalent and again from a regulatory perspective we'll be working to refresh our information sharing agreements, all of those I think are well known and fingers crossed should be fairly straightforward.

Okay, time for some audience questions. Sarah will be here probably for a while, here's one for you. Does Australia intend extending the clearing mandate for buy side firms any time soon?

Okay so I guess the first thing would be that APRA, ASIC and the RBA have a requirement to provide advice to government on mandates whether that's trade reporting, clearing or clearing mandates. I think the short answer is that we're not planning; we don't have any imminent plans to roll out a clearing mandate for the buy side. If we do decide to consider that in the future there will be substantial amount of consultations so there'll be opportunities for people in this room and elsewhere in the industry to comment and input into that. But I think there was a report that we put out in 2014 when we actually formally considered whether we should apply such a mandate to what we call 'non-dealers' that with a few exceptions non-dealer activity in OTC derivatives is relatively limited and motivated primarily by hedging of underlying cash flows and exposures and there was a real concern about forcing clients into clearing especially those that had restricted access to liquid assets.

So we did kind of note that we thought commercially that there would be incentives going forward as well as some of the other regulatory reforms, and I think we're seeing that happening now. Obviously one of the things that was quite surprising was that a lot of the risk that's put in CME and LCH I think over 50% of that risk actually relates to buy side clients so it's happening in the absence of mandates. So I think our approach remains appropriate at this stage and its effectively borne out by the preliminary findings in the DAT consultation paper so that's where we stand.