Post-trade risk mitigation services take off in Asia

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Adoption of post-trade initiatives in Asia Pacific’s financial services sector is growing, claims a newly-published white paper from post-trade infrastructure provider TriOptima.

The whitepaper, entitled ‘Post Trade Risk Mitigation in Asia’, also provides a summary of clearing requirements and the over-the-counter (OTC) derivatives landscape in the region.

Unlike Europe and the US, Asia lacks a single regulatory regime or universally accepted best practices criteria for OTC derivative post trade activities. Most Asian countries maintain independent national regulatory regimes, but there has been a recent move by many of them to adhere to the G20 Principles and comply with global standards articulated by the Basel Committee on Banking Supervision (BCBS) and the International Organisation of Securities Commissions (IOSCO) committee.

“Major markets such as Australia, Hong Kong, Japan and Singapore are leading the way in adopting post-trade services to mitigate counterparty credit risk, reduce operational risk and control capital charges,” said Yutaka Imanishi, chief executive officer (CEO) of Asia Pacific, TriOptima. “In these countries clearing, portfolio compression and portfolio reconciliation are widely employed and successful.”

Fifteen per cent of trades transacted in the global OTC derivatives market take place in Asia; close to 70% of these are now cleared either in national clearing houses or in clearing house LCH’s SwapClear. Asian markets have seen rapid implementation of clearing rules and central counterparties (CCPs) over the past few years.

The introduction of portfolio compression; the process of reducing outstanding transactions to reduce capital charges, operational costs and compliance with the Basel III leverage ratios, has been a key development within the post trade risk mitigation arena. Since 2004, more than 70 Asian market participants have participated in TriOptima’s triReduce multi-lateral compression rounds for both cleared and uncleared interest rate and credit default swaps (CDS).

The post-trade practice of portfolio reconciliation, whereby the portfolios of multiple companies are reconciled post-transaction to check for valuation and submission errors, has been steadily growing in Asia since being first adopted in Europe and the US.

The rise of portfolio reconciliation in Asia has been driven by pressure from counterparties in Europe and the US mandated by their regulators to reconcile portfolios. This interest has been accelerated, according to the white paper, in anticipation of the new margin rules that will take effect in 2016-2017 as margining relies on portfolio reconciliation for accurate calculations.

In line with G20 objectives to make the OTC derivatives market more transparent, Asian regulators including: the Australia Securities and Investment Commission (ASIC), the Hong Kong Monetary Authority (HKMA), and the Monetary Authority of Singapore (MAS) have begun to implement transaction reporting to a swap data repository similar to their Europe and US counterparts. These regulators are yet to report problems of low data quality – as has been experienced in Europe and the US, but as reporting by different counterparties or their designated agents takes hold – TriOptima expects the same issues will arise in Asia.

Despite the increased interest in post trade and risk mitigation services in Asia, further adoption has been hampered by the perception that to deliver these services requires additional human, financial and IT resources. As such, it is up to service providers to educate regional players on the value of efficient risk management practices, help them implement these services into their workflow and take adoption to the next level.

“There is room for improvement in the adoption of post trade risk mitigation services such as those offered by TriOptima in Asia,” said Imanishi. “Local regulators continue to evolve their individual regulatory frameworks to conform with BCBS/IOSCO standards. In time, we anticipate that clearing, portfolio reconciliation, repository reconciliation and compression will become business as usual for most companies within Asia.”

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