malcolm edey : the transition to central clearing of otc derivatives in australia speech by mr malcolm edey, assistant governor ( financial system ) of the reserve bank of australia, at the international swaps and derivatives association ’ s ( isda ) 2015 annual australia conference, sydney, 22 october 2015. * * * i thank mark manning for his invaluable assistance in preparing these remarks. good morning and thanks to isda for the opportunity to speak here today. when i last addressed this forum three years ago, it was a time of quite significant stress in world financial markets. a particular focus of concern was the unfolding crisis in greece and the associated risk of spillovers to other parts of europe. a lot has happened since then. as a general observation, financial conditions around the world have been gradually recovering, though not without some periodic bouts of nervousness. the concerns about greece came to a head around the middle of this year, and spillovers from that have turned out so far to be quite limited. more generally, the world economy has been expanding at a reasonable pace over these three years, and the process of balance sheet repair has continued. these are positive developments. nonetheless, in some important respects the situation is still some way from returning to normal. the after - effects of the global financial crisis are still weighing on activity in some of the major economies. and interest rate settings around the world are still at exceptionally low levels to support growth, seven years after the crisis reached its height. all of this underscores the point that financial crises are costly events. they are costly in terms of lost income and output, lost jobs and damage to institutions. and we ’ ve seen again that it takes a lot longer to recover from a financial crisis than it does from other types of economic downturn. these are good reasons for the global efforts that have been made over the past few years to build resilience in our financial systems. a great deal of work is underway on that front, at both national and international levels. in australia, we have had a major inquiry into the financial system which, as one of its priorities, made a number of recommendations to strengthen financial resilience. key recommendations in that area have been endorsed by the government this week. internationally, there has been an extensive program of regulatory reform initiated by the g20 and coordinated through the international standard setting bodies. today i want to focus on just one aspect of that work, namely the move to central clearing of

mandate would be to pursue the overarching objective of financial stability and an additional key objective of continuity in the provision of critical services. in this week ’ s response to the financial system inquiry, the government agreed to progress additional measures in this area. the committee on payments and market infrastructures ( cpmi ) and the international organization of securities commissions ( iosco ). this framework is set out in the fsb ’ s key attributes of effective resolution regimes ( ref ). bis central bankers ’ speeches supporting market functioning in implementing all these reforms, the australian authorities have been careful to intervene only where necessary, so as to preserve appropriate incentives and avoid imposing unnecessary costs on industry participants. this was reflected in the initial preference for industry - led solutions that relied on private incentives. the bank and the other regulatory agencies took the view that an industry - led approach would allow the transition to occur in a measured way, and would avoid unnecessarily interfering with commercial outcomes. the decision, ultimately, to recommend a mandated approach, and the government ’ s acceptance of that advice, were driven importantly by considerations of international consistency. in a number of cases, products had already been mandated for clearing in other jurisdictions, notably interest rate derivatives denominated in the major currencies. the regulators took into account the benefits that could arise in such cases from favourable comparability assessments of the australian regime, and from avoiding opportunities for regulatory arbitrage. these, of course, needed to be balanced against any possible adverse implications that regulatory intervention might have for market functioning. by the time they issued their recommendation in respect of interest rate derivatives in the major currencies, the regulators were confident that the industry had already made considerable progress in the transition to central clearing for these products. the incremental cost of regulatory intervention was therefore expected to be low. by april 2014, when the regulators also recommended that australian dollar - denominated interest rate derivatives be centrally cleared, the australian banks were already well advanced in becoming direct participants of the two licensed clearing services, lch. clearnet limited ( lch. c ltd ) and asx clear ( futures ). during the period since those recommendations were made, the transition to clearing among australian banks has continued to accelerate, even though the clearing mandate has only recently been confirmed and has yet to take effect. our liaison with australian banks reveals that they are now centrally clearing almost all new trades that are eligible for clearing, and have also made considerable progress in backloading