2 July 2013

Government approves LCH.Clearnet Limited to clear over-the-counter (OTC) interest rate derivatives

The Parliamentary Secretary to the Treasurer Bernie Ripoll today announced that he has approved the variation of the Clearing and Settlement Facility License (CSFL) of LCH.Clearnet Limited (LCH) to allow its SwapClear facility to directly clear OTC interest rate derivatives in Australia.

Clearing houses, such as LCH, reduce risk in the financial system by providing a means to manage counterparty risks between parties to financial transactions.

The Parliamentary Secretary also approved the SwapClear facility as a netting market for the purposes of the Payments and Netting Act 1998. This will provide commercial certainty to clearing participants by affording insolvency protection in the event that a participant enters external administration.

Improved access to central clearing will reduce the risks associated with extensive existing client clearing arrangements; encourage the clearing of the systemically important interest rate swaps traded by Australian market participants; and promote competition in clearing services.

The availability of central counterparties licensed to clear OTC interest rate derivatives in Australia will also facilitate compliance with Australia's G-20 OTC derivatives reform commitments.

"Derivatives markets provide a means for financial market participants and end users, such as Australian exporters, to manage risk. Efficient and safe derivatives markets benefit the broader economy" Mr Ripoll said.

"This decision will be positive for interest rate swaps market participants based in Australia as it will provide greater choice of central counterparties through which participants can directly clear trades and thereby reduce counterparty risk" Mr Ripoll said.

"The approval of this licence variation will promote greater competition and foreign participation in the Australian financial market, place downward pressure on fees, and provide critical market services directly to Australian market participants" Mr Ripoll said.

Appropriate controls have been agreed between LCH and the regulators to ensure that SwapClear operates in a safe, fair, orderly, efficient and effective manner.

LCH will continue to work with ASIC and the Reserve Bank of Australia to ensure all requirements are met and a smooth commencement of operations takes place.

Initially, the SwapClear facility will be limited to clearing OTC interest rate derivatives. However, the Government notes LCH's interest in also offering services in relation to the derivatives market more broadly in addition to the Financial and Energy Exchange Global Pty Ltd (FEX) Market (which LCH were previously licensed to clear for).

The announcement follows the recent regulatory approvals given to the ASX's proposed launch of derivatives clearing and provides direct competition in clearing for the major category of OTC derivatives traded internationally.

Any future request to expand LCH's operations beyond their current scope will be considered on its merits and subject to further advice from the relevant regulators.

2 July 2013