LEADER
>>> Challenges and risks
Significantly however, while SGX has an eye towards EMIR and Dodd-Frank, no mandatory regulation is yet on the horizon in Singapore. Tis brings with it with the risk, or the opportunity, depending how you look at it, for regulatory arbitrage. Tis is an evolving story and it remains to be seen whether OTCFX clearing becomes a global phenomenon.
“Te global nature of the FX market means that clearing infrastructure and processes need to be as harmonised as possible across the world’s financial centres. Regulatory harmonisation will be key to enabling participants to trade quickly and efficiently with their global counterparts, whilst avoiding the negative consequences of regulatory arbitrage.” says Wayne Pestone, Chief Regulatory Officer, at FXall.
However, where relatively rarely traded and unstandardised NDF currency pairs are traded in local emerging markets, less tightly regulated regimes will most likely still apply.
Meanwhile vendors providing trading platforms for institutional, global clients have some challenges to
overcome. “Te biggest challenge we are going to have [in the new regulatory environment] is configuring a multi drop copy capability and sending it to enough people who are interested in that trade,” says Jonathan Woodward head of Asia-Pacific at FXall. “For example,” he says, “if you had some American money domiciled in Hong Kong but then traded with a Singaporean bank and cleared with SGX you are going to need to report that to authorities in the US, Singapore and Hong Kong. So, instead of just giving the client some straight through processing you have to think, “where else do they want us to drop this information so that they comply with any future regulations?”
What quickly becomes clear from this is that multibank portals or electronic communications networks (ECNs) that have global capabilities to connect with CCPs, clients and regulatory authorities wherever they are based, have a pivotal role to play. Which is not to say that single bank platforms do not, because they may provide additional, more specialised and less standardised services to their clients. However interoperability is vital. No portal can afford to be an island or its clients will quickly migrate to where communications to all relevant parties to its activities are easiest, most efficient and lowest cost.
So, for example, at Nomura, Mark Croxon who is executive director, prime services and global product manager for OTC clearing, says the objective is, “to build a clearing house agnostic service across products, asset classes and regions. Tat does present some challenges in terms of ensuring the connectivity to each of those clearing houses and venues. Tere are challenges with getting the plumbing set up, although there are a number of vendors who can help with this. You may also have a connectivity unit internally that is there to set up and maintain some of the connections.”
Jonathan Woodward
“Te biggest challenge we are going to have in the new regulatory environment is configuring a multi drop
copy capability and sending it to enough people who are interested in that trade,”
26 | january 2012 e-FOREX
Minimising systemic risk remains at the core of the various efforts to develop OTC clearing. “Te intention of the legislation is to reduce systemic risk by making OTC markets and counterparty risk management more transparent. Specifically around risk management, it is about having the collateralisation and default management processes prescribed and the margins and default fund contributions relating to those positions being posted and being held up front at the central clearing house. Furthermore rules in the US, and incentives from a regulatory capital perspective under Basel III, are leading to segregation of those funds risk and the exposure to significant institutions defaulting,” says Croxon.
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