Hong Kong, Singapore and Australia will introduce strict new rules for trading over-the-counter ("OTC") derivatives on 1 March, as the three jurisdictions look to implement international reforms drawn up in the wake of the 2008–2009 global financial crisis, regulators said on Tuesday, 6 December.
The global rules, which will require dealers to post and collect collateral or "margin" against OTC trades, are set to dramatically raise the cost of trading in the $500 trillion global swaps market.
The Hong Kong Monetary Authority ("HKMA"), the Monetary Authority of Singapore ("MAS"), and the Australian Prudential Regulation Authority ("APRA") said in notices published on their websites on Tuesday that they would each phase-in the new margining requirements as of 1 March with a six-month implementation period.
Following the financial crisis, global regulators drew up rules to increase transparency and reduce risks in the OTC derivatives market, which was largely responsible for the collapse of Lehman Brothers and bringing insurance giant AIG to its knees.
These included pushing some OTC trades onto exchange-like platforms and through clearing houses which guarantee payment in the event either party defaults. The rules aim to secure trades that are too complex or illiquid for exchanges and clearing houses to handle.
The global cost of funding the margin rules is likely to ultimately exceed $500 billion, according to USand European regulators.
The United States and Japan introduced the rules in September 2016, sparking some initial trading disruption.
Hong Kong, Singapore and Australia held off in order to align with the European Union, which is expected to finalise its rules shortly.
Regulators hope to align the implementation timeframe to reduce the risk of market dislocation caused by different dealers having to comply with different rules.
The new rules require banks to make significant changes to their trading technology, operations and client agreements, with some industry insiders warning the March timetable is tight.
Tuesday's announcements offered the industry long-awaited clarity on the timeframe for the rules, said Keith Noyes, Regional Director, Asia Pacific at the International Swaps and Derivatives Association ("ISDA"), which has been closely involved in industry discussions with regulators regarding the rules.
"ISDA can now work on finalising the vital documentation required by counterparties to trade under the new rules. The fact that the regulators have proposed a six-month transition period from 1 March will give the local market participants much needed time to negotiate and implement the changes."