The Council of Financial Regulators has commenced a consultation in relation to the central clearing of bond and repos in Australia.
“Given the centrality and importance of the bond and repo markets, it is crucial that these two markets function continuously and effectively, even in stressed circumstances” the CFR said in its consultation paper, published late last week.
“Central clearing has been introduced in other core markets, such as the market for over-the-counter (OTC) interest rate derivatives. Central clearing in these markets has enhanced risk and default management, increased transparency and provided operational efficiencies.
“This has led to improved market functioning and reduced systemic risk” the CFR said.
In 2015 the Reserve Bank evaluated the case for a central clearer and ended up takin g no action.
So currently, still, there is no central counterparty that clears transactions in the Australian bond and repo markets.
This means that clearing occurs bilaterally and reflects the complex web of transactions that occur between participants.
In 2015, the RBA conducted a public consultation on the costs and benefits of central clearing of repos in Australia. The RBA concluded that there was no financial stability case to actively promote the introduction of a CCP in the Australian repo market.
“Factors such as the participation structure of the market and existing risk practices – in particular the significant role of the RBA at that time as a cash provider – meant that the case for a repo CCP was not as strong in Australia as in some other markets.
“Recent analysis by RBA staff indicates that the potential benefits of central clearing bonds and repos in Australia have increased since the RBA’s 2015 Consultation.
“This reflects substantial growth in the underlying markets and structural change to the composition of market participants. In response to this and renewed interest from Australian market participants, the CFR is seeking feedback from stakeholders on the magnitude of any costs and benefits that may accrue from the introduction of a CCP in the Australian bond and repo markets.
“Feedback is also sought from stakeholders to understand the circumstances under which a bond and repo CCP could be operated safely and efficiently by an overseas operator and what additional protections may be required for Australian bond and repo markets. The CFR is not proposing to consider the introduction of a clearing mandate as part of this consultation.”