Asian legislators await international clarity on OTC and FX regulation

As foreign exchange market participants count the days until the deadline for the implementation of the US Dodd-Frank Act in July and await further clarity on the European Union's derivatives reforms, both the timeline and scope of new rules in Asia are less clear.

The Group of 20 leading economies signed commitments in 2009 to trade all standardised over-the-counter derivatives on exchanges or electronic platforms, where appropriate, and to clear them through central counterparties (CCPs) by the end of 2012 at the latest. Although that group includes a number of eastern countries such as China, Japan, Australia and Indonesia, legislators in those countries have so far taken a wait-and-see approach as rules are developed at a faster pace in Europe and the US.

Market participants and lobbyists don't expect much progress in Asia for some time to come, partly because the process is more disparate, with no single regional authority to steer the rule-making as there is in Brussels and Washington, DC.

"There is no pan-Asian regulatory body in the same way you have got the EU. We do not expect to see anybody go out on their own and take a different approach from the others; that is not going to make much sense," said Jeremy Hill, head of FX and money-market operations at Royal Bank of Scotland in London and co-chair of the FX operations committee of the Association for Financial Markets in Europe (Afme).

Although Afme's global FX division has concentrated much of its lobbying efforts on the US and Europe, it also closely follows the regulatory process in Asia and is seeking to expand its membership in the region. On April 4, the group announced the addition of its 22nd member, Bank Tokyo-Mitsubishi UFJ. Akira Hoshino, head of FX trading and chair of the Tokyo Foreign Exchange Markets Committee, will represent the bank on the group's board. Other Asian banks on the board include Nomura and Standard Chartered.

"It has always been our plan to expand into Asia and signing up Bank Tokyo-Mitsubishi UFJ is a clear statement of intent. With its expertise and input, we look forward to having even more interaction with the regulatory process in Asia," said James Kemp, managing director of the global FX division in London.

According to Afme, total FX average daily turnover in Asia now amounts to $1.16 trillion, more than half that of Europe, which stands at $2.78 trillion but more than North America's $966 billion. However, while the addition of Asian institutions might bolster Afme's lobbying efforts in the region, market participants suggest Asian legislators are unlikely to decide on a particular course of action until the completion of the US rulemaking process, and possibly also the parallel process in Europe.

One regulator that will have to make such decisions in Asia is the Monetary Authority of Singapore (MAS). MAS says it supports the G-20 commitments to promote greater transparency and financial stability in the OTC markets, but is waiting for clarity from its international counterparts.

"MAS is monitoring international developments in the implementation of the G-20 mandates, including increasing standardisation of OTC derivatives, central counterparty clearing and reporting of transactions, and will implement measures that are appropriate for Singapore's markets," said a spokesperson for MAS.

But MAS declined to comment on whether FX swaps and forwards will be excluded from clearing requirements in Asia, and some CCPs are pushing ahead to develop clearing platforms despite the uncertainty. The Hong Kong Exchange is understood to be developing a CCP for OTC derivatives and the Singapore Exchange (SGX) recently confirmed plans to launch clearing for currency forwards, possibly as early as June, following its launch of interest rate swaps clearing in November.

"We are beginning to look at foreign exchange forwards as the second asset class. But one of the issues is that the pace at which those regulations are kicking in appears to have slowed down, and so we are not so sure everyone is going to jump into clearing this instrument," said Muthukrishnan Ramaswami, president of SGX in Singapore.