Singapore unveils planned OTC derivative shake-up

SINGAPORE - Singapore's central bank said on Monday it is proposing to force many over-the-counter (OTC) derivative trades to be centrally cleared, a move aimed at trying to reduce the level of risk posed by one of the most opaque areas of finance.

The reforms are in line with the pledges made by the Group of 20 leading economies in the wake of the collapse of Lehman Brothers. Their goal is to make it easier to supervise derivative trading and reduce the risk that one failed financial institution could pose to the wider finance system.

"The proposals will reduce systemic risk, improve transparency and protect against market abuse in Singapore's OTC derivatives market," said Teo Swee Lian deputy managing director for financial supervision at the Monetary Authority of Singapore (MAS).

But Singapore, whose OTC derivative market has around US$9.8 trillion in outstanding contracts, is not currently planning to mirror the reforms taken by the United States and Europe by forcing such products to be traded on exchanges or electronic platforms. RATE SWAPS, FX MAY ALSO BE CONSIDERED

MAS said in a consultation paper that it is also proposing that all OTC derivative trades spanning commodities, credit, equities, foreign exchange and interest rates must be reported to a trade repository.

Singapore is one of the largest trading centres for OTC derivatives in Asia, although the size of its market still pales in comparison to those in the United States and Europe, which account for about 80 per cent of all trades.

The MAS has not yet decided which OTC derivative trades must be centrally cleared, although it said in its consultation that Singapore and US dollar interest rate swaps along with the non-deliverable forwards of certain Asian currencies appear to meet its proposed criteria for products which could and should be centrally cleared.

Singapore Exchange Ltd has offered clearing services for interest rate swaps since late 2010 and for non-deliverable forwards since October last year. MAS, though, is not proposing that any trades must go through a domestic clearing house, meaning international players such as LCH.Clearnet and CME Group Inc could provide the SGX with some competition.

MAS said it is also working with the Singapore Foreign Exchange Committee to encourage standardisation of OTC derivative products.

The paper is also proposing that supervision of commodity derivatives trading and clearing should be transferred from the oversight of Singapore's trade agency International Enterprise to the MAS.

Market participants have until March 26 to comment to the MAS, which aims to have the framework in place by the end of 2012.

Source: Singapore Press Holdings Ltd

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