Asia Securities Industry & Financial Markets AssociationDevelopment of Derivatives Markets

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June 13, 2018 – Asian Regional PDM Forum, Koh Samui, Thailand

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Introduction – Importance of Derivatives Markets

◼ Derivatives markets create a number of economic benefits

◼ They provide investors with an indication of future prices and allow

for the effective hedging of risk

◼ This in turn attracts more market participants, higher transaction

volumes and greater liquidity

◼ Over-the-Counter (OTC) derivatives products help industrial

companies and governments to effectively finance & manage risks

◼ Derivatives help pension funds to meet their obligations to retirees

◼ Derivatives support economic growth by enabling banks to lend to

individual and corporate customers

◼ They play a vital role in every industry – from international trade to

financial services and home mortgages, among others

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Asian Derivatives turnover soars – but remains at low levels

◼ Asian FX & Interest Rate derivatives turnover has grown 67% over April 2007-2016 to USD 2.0 trillion

◼ Asian IRD and FX CAGR of 5% and 6% annually respectively, over the last 9 years, are faster than

global FX CAGR of 4% and IRD CAGR of 5% per annum

◼ However, as a proportion of total global volumes, Asia accounts for only 10% of total global turnover in

Interest Rate Derivatives while FX accounts for 26%

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Swaps account for the bulk of Interest Rate Derivative Turnover

◼ Total IRD turnover increased to USD 298 billion in April 2016 from USD 187 billion in April

2007

◼ This represented a growth rate of 59.4%, over the last 9-year period

◼ Swaps accounted for 82% of total IRD turnover, while options and other products contributed

14% and FRAs contributed 4% in 2016.

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FX Swaps and Spot transactions dominate overall FX turnover

◼ The total average daily turnover of FX increased to $1.7 trillion in April 2016 from $1 trillion in April

2007

◼ FX swaps and spot FX account for the bulk of FX turnover in Asia, accounting for 54% and 26% of

turnover respectively, in 2016

◼ Longer-dated cross-currency swaps, outright forwards and FX options constitute the balance of total

turnover

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Growth in IRD turnover across Asia reveals a mixed bag

◼ While IRD turnover has grown in the aggregate, turnover data across Asia vary widely – there is no

clear pattern

◼ Since 2007, Australia, China and Hong Kong have grown robustly, as has the Philippines, but off a very

low base

◼ India, Indonesia & Malaysian turnover has declined, while comparable Thai figures have edged lower.

Changes in the product mix stemming from a slowing trend in FRAs has contributed to this trend

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FX Turnover growth in Asia has been more consistent than IRD

◼ FX turnover growth in Asia over the last decade has been more consistent, with most countries

recording robust growth

◼ Only Australia and New Zealand have recorded falls in FX turnover, while India had been flat

◼ The gradual internationalization of the RMB has led to China FX turnover growing strongly

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Derivatives Markets developments post the Global Financial Crisis

◼ In the aftermath of the global financial crisis, the G-20 focused on

the role of OTC derivatives in the spread of systemic instability

◼ The Financial Standards Board (FSB) was tasked with developing a

framework that would drive users to exchange-traded derivatives

and standardized OTC instruments that would be centrally cleared

◼ Non-centrally-cleared OTC derivatives would be subject to higher

margin and capital requirements under the Basel Committee of

Banking Supervision (BCBS)/IOSCO proposals under Basel III

◼ The more developed Asian markets (HK, Singapore, Japan &

Australia) have decided to implement most of the G-20 proposals

◼ China, India & Korea have focused more on central clearing & the

establishment of trade repositories

◼ The smaller markets – Indonesia, Malaysia and Thailand have not

made any proposals with regard to central clearing

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Issues and Challengies in Asia

◼ There are significant legal uncertainties and weak contractual

enforceability, particularly in the less developed OTC derivatives

markets – China, India, Malaysia, the Philippines and Thailand

◼ Fragmentation of Asian CCPs given the small size of the Asian

clearable market, coupled with mandatory central clearing in all

these markets is an issue

◼ On account of CCP fragmentation, netting and the use of collateral

become inefficient and leads to higher clearing charges

◼ The extraterritoriality of US and EU regulations have created a

number of issues for Asian markets, notably third country CCP

recognition/equivalence under EMIR (article 25) and MIFID II

◼ Regulatory proposals regarding significantly higher margin

requirements on non-centrally cleared derivatives is an issue

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Derivatives Market Development has to occur sequentially

◼ A systematic approach to the development of derivatives markets is required, particularly in the Lesser

Developed Economies

◼ The development of liquid cash, money and short-term government debt markets is the first step

◼ Longer-term yield curves for government & municipal securities, followed by the development of a

corporate bond market, is the next step

◼ The final step is the creation of deep & liquid capital markets, including equities, asset-backed

securities (ABS), futures, options and other derivatives

◼ Finally, the development of an active investor base, including pension & mutual funds and insurance

companies and the creation of a favourable environment for international investors, is required

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Recommendations to help develop derivatives markets

◼ Address legal uncertainties and strengthen contractual enforceability

(e.g. closeout netting, collateral rights)

◼ Netting enforceability issues in China, India, Indonesia, Malaysia

and Vietnam need to be resolved satisfactorily

◼ Allowing counterparts to deal with each other on a net –rather than

gross – basis would allow for expanded trading in liquid markets

◼ Manage extraterritoriality of US and EU regulations (in particular,

third country CCP recognition criteria) and help in the setting of

global standards

◼ Prevent fragmentation of Asian CCPs – The implementation of pan-

Asian clearing solutions would be helpful

◼ Refrain from imposing initial margin requirements – One solution is a

mix of robust Basel III capital structure & CVA charges, mandatory

variation margining & standardized/liquid OTC derivatives clearing

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The FX Derivatives Margin regime varies across jurisdictions

◼ BCBS/IOSCO issued a framework to establish minimum standards for the margin requirements of non-centrally cleared

derivatives in March 2015

◼ The treatment of exposures with counterparties in non-netting jurisdictions could limit the ability of market participants to

continue to trade in these jurisdictions thereby impacting liquidity and lead to an increase in trading costs

◼ The footnotes are explained below:

- * Delay granted for variation margin on FX forwards until earlier of 31 December 2018 or application of MIFID II

Amendments

- ** So long as certain conditions meet ratio of notional to total notional of all non-centrally cleared derivatives at Group Level

- 1 Under the BCBS/IOSCO Margin requirements for non-centrally cleared derivatives, deliverable swaps and forwards are

exempt

- 2 BCBS Supervisory Guidance for managing risks associated with the settlement of foreign exchange transactions

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Most developed Asian CCPs have recognition (EMIR) or exemption (CFTC)

◼ With the exception of China and India (which are large but relatively underdeveloped), the other

developed Asian CCPs have got recognition under EMIR and DCO exemptions from the CFTC

◼ With regard to FX, only India has imposed mandatory clearing on FX products

◼ Most CCPs offer a range of products that can be cleared locally

Thank You

All the data points in this presentation have been obtained from analyses carried out by ISDA, BIS, KPMG and our affiliate association GFMA (Global Financial Markets Association)

Contact:Vijay ChanderExecutive Director – Fixed Incomevchander@asifma.org+852 2531 6521ASIFMA