Singapore central bank may insist on mandatory clearing of OTC derivatives

Singapore central bank may insist on mandatory clearing of OTC derivatives
PHOTO: ST

SINGAPORE - Singapore's central bank said on Wednesday it was beginning work on processes for mandatory clearing of swaps and other currency derivatives with the aim of curbing systemic risks from those trades.

The Monetary Authority of Singapore (MAS) said it had invited market participants to submit proposals and views on its plans to introduce mandatory clearing of over-the-counter (OTC) fixed income and currency derivatives.

Under central clearing, these products would be traded and settled on a single entity that acts as an intermediary between two counterparties to a trade, and thereby helps offset risk. The push to make clearing mandatory came from global regulators after the 2008 financial crisis.

The MAS said a regulatory change in 2012 gave it the power to mandate reporting of OTC derivatives to trade repositories and to require the central clearing of OTC derivatives. Banks in Singapore are already required to report their trades.

The central bank said it would assess which derivative contracts should be subject to mandatory clearing based on factors including potential systemic risks, depth and liquidity of the products. "Central clearing is a key component of broader reforms to make the trading of OTC derivatives safer," the MAS said in a statement.

The central bank proposes to mandate Singapore dollar and U.S. dollar interest rate swaps for central clearing as these are the most widely traded interest rate derivatives in the city-state.

Initially, the mandate will only apply to banks that book in excess of US$20 billion worth of derivatives contracts, on a gross notional outstanding basis, it said.

The MAS is considering subjecting interest rate swaps denominated in the euro, the British pound and the Japanese yen to mandatory clearing obligations.

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