Today the Government releases the final report of the Council of Financial Regulators (the Council) outlining its proposed next steps towards the implementation of Australia's G20 commitment to improve risk management and reduce systemic risk in the ‘over-the-counter' (OTC) markets for financial derivative products.
Consistent with the advice of the Council, the Government will consult further with stakeholders in the coming months on legislation for amendments to the Corporations Act to build a legislative framework for complying with Australia's international obligations, and today releases a consultation paper which seeks stakeholder views on the detailed design of future regulatory settings.
The global financial crisis highlighted the massive build-up of systemic risk in some advanced countries through the rapid growth of highly complex, leveraged derivative products which were traded outside appropriately regulated and transparent markets. In September 2009 the G20 endorsed a global transition of derivatives products - which are currently traded through bilateral arrangements between parties, or ‘over-the-counter'- towards recognised exchanges or trading platforms where appropriate, in order to boost market transparency. The G20 also agreed that all standardised OTC derivatives should be cleared through a central counterparty and all OTC derivatives should be reported to trade repositories, in order to reduce systemic risk and enhance transparency. The G20 committed to make this transition by the end of 2012.
The Government and regulators have been working through global forums since the crisis to develop a comprehensive framework for improving transparency and risk management in relation to derivatives trading.
The Council has engaged extensively with domestic market participants since 2009 to identify the most appropriate policy settings for Australia in meeting our G20 commitments, including the release of a discussion paper in June 2011.
The Council recommends the development of a legislative framework which allows regulators to take a dynamic approach as the Australian market evolves, and allows for mandated outcomes should these be required for financial stability objectives and to meet our international obligations. However, the Council has advised that where possible market driven solutions, in part driven by appropriate regulatory incentives, should be preferred. The Council advises that it does not consider restrictions should be placed on local participants in accessing domestic or offshore financial infrastructure at this time, subject to appropriate safeguards being in place.
The Treasury, with other Council agencies, will now engage with stakeholders for a two month period to seek views on the contents of the regulations to be made under the legislative framework, with interested stakeholders also having an opportunity to comment on legislation before introduction.
A copy of the Council's recommendations, the consultation paper and details on consultation are available on the Treasury website.
This is an important step towards further ensuring the stability of our financial system for the benefit of all Australians.