1 March 2016
KPMG | Is Asia Pacific ready for margin requirements for non-centrally cleared OTC derivatives?
In diagnosing triggers of the Global Financial Crisis (GFC), a myriad of causal factors have been debated and scrutinized. Although it is far too simple to identify one catalyst of the GFC, it is evident that one factor did stoke the contagion flame – perhaps more than any other – and that was the role of derivatives.
A number of high-profile over-thecounter (OTC) derivative dealers experienced runs on their derivate operations during the GFC. Colossal, unhedged positions – particularly through Credit Default Swaps (CDS)
– combined with the globalization of business – detonated the world’s financial foundation.
To prevent a repetition of such a scenario and reduce the risk stemming from the opaque dynamics of the OTC derivative industry, there has been extensive international dialogue between multilateral and national regulatory bodies. As a result, the financial sector is on the cusp of facing enforced rules pertaining to the Margining of
Uncleared OTC derivatives. These rules and regulations will have huge ramifications for financial institutions globally.
In 2011, the Group of 20 (G20) agreed to add margin requirements on non-centrally cleared derivatives to the OTC reform program. The international forum called upon the Basel Committee on Banking Supervision (BCBS) and International Organization of Securities Commissions (IOSCO) to develop global standards to meet two core goals:
I. Reduction of Systemic Risk
II. Promotion of Central Clearing Although far-reaching and more extensive in scope, imminent global financial regulation will ensure that all standardized OTC derivative contracts be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties.
The implications of such regulation will be vast: structurally, physically and financially. With less than a year before the regulation is imposed, banks need to brace themselves for widespread transformation. In particular, Asia Pacific (APAC) banks need to quickly prepare for adaptation to ensure they are not caught surprised by the forthcoming changes.
To support financial institutions in the APAC region, this paper examines three primary considerations:
I. Highlight the key components of the Uncleared Margin regulation.
II. Identify the subsequent challenges facing regional financial institutions.
III. Evaluate what is required to ensure compliance, and furthermore, to avoid the substantial impact that comes with failing to meet the global deadlines