Major Western banks may have to scale back or even withdraw from some of Asia’s developing financial derivative markets due to regulatory hurdles and rising costs.
Under new global regulations, banks must put their trades in commonly traded, over-the-counter derivatives such as interest rate swaps through central clearing houses.
The problem lies with the rules at new clearing houses in India, China and South Korea, which risk making it prohibitively expensive or even impossible for some foreign banks to trade derivatives in these countries. For instance, members of India’s clearing house, the CCIL, are concerned they could be exposed to unlimited liability should one or more participants default.
Another big sticking point is whether the CCIL, along with China and South Korea’s planned new derivative clearing venues — the Shanghai Clearing House and Korean Exchange — will meet the standards for clearing houses set by the global markets supervisory body IOSCO and the central banker’s Committee on Payment and Settlement Systems.
Understandably, foreign banks are reviewing the costs of staying in these markets. “The CPSS-IOSCO compliance issues come down to cost as banks can still clear at non-compliant CCPs, only that they will face much higher regulatory capital charges," said Keith Noyes, Asia-Pacific regional director for the International Swaps and Derivatives Association (ISDA).