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Preparing for new trading regulations
Many buy- and sell-side businesses in Asia are already beginning to prepare for upcoming trading regulations, partly because of the efficiencies on offer, says Andrew Bernard, head of Asia, Tradeweb
Andrew Bernard 18 Mar 2015
 
   
Many buy- and sell-side businesses in Asia are already beginning to prepare for upcoming trading regulations, partly because of the efficiencies on offer.
 
While regulations covering the trading of over-the-counter (OTC) derivatives in Asia have yet to be fully defined, it is clear that the trading environment in the region will look very different in the future.
 
The Financial Services Agency (FSA) in Japan has now published its requirements for electronically trading yen swaps on electronic trading platforms (known as ETPs), which will come into effect on  September 1 2015. Australia is phasing in its reporting rules and developing its clearing proposals, while Hong Kong and Singapore are also expected to focus on introducing clearing and reporting mandates. 
 
Much like similar regulatory initiatives in other developed economies, these new rules are a response to the G20 commitment that “all standardized OTC derivatives contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties”. The shared intention of regulators to create more transparent markets and increase stability will ideally create broadly similar policies worldwide. We can say for certain that market participants in Asia, as elsewhere, will satisfy their regulatory requirements, while trading swaps more effectively, by using electronic trading platforms.
 
Does the record of implementation elsewhere provide any lessons for Asian investors and regulators? In a word, yes. In the US, the Dodd-Frank Act was introduced to regulate the derivatives market, and the Commodity Futures Trading Commission (CFTC) has now implemented the mandatory trading requirements under these laws. Before the CFTC introduced swap execution facilities (SEFs) in 2013, less than 10% of dealer-to-customer dollar swap volume was transacted electronically. Now SEF volume stands at around 40% of the market – but such a wholesale change in market behaviour has only happened so quickly because it was mandated.
 
The speed of this transition demonstrates the benefits of phase-in programmes. In the US, the made-available-to-trade (MAT) milestones – gradually increasing the swaps to be traded on SEFs – allowed the derivatives market time to adapt to a new trading landscape, and meant there was a step-change increase in electronic volume after each of the milestones was passed.
 
Many cash bond market participants are already aware of, and active in, elements of e-trading, while certain institutional investors and banks in Asia are already actively trading interest rate swaps on electronic platforms.
 
 Meanwhile, the first electronically-traded and JSCC-cleared yen swap transaction by a Japanese bank was executed in June 2014 – more than a year before the electronic trading of yen swaps will be mandated in Japan, on  September 1  year.
 
Many dealers in Asia have responded to client demand by increasing their capacity to respond efficiently to electronic enquiries.
 
In terms of creasing demand, there are a number of drivers. Firstly, it is easier to demonstrate that you are meeting regulatory requirements when you trade electronically. For instance, e-trading platforms help firms prove best execution by creating audit trails for each auction and generating post-trade summary or compliance reports.
But electronic execution also offers benefits beyond compliance: from efficiency gains throughout the trading workflow to reductions in costs and operational risk. Indeed, these factors have already been driving the growth of e-trading in global fixed income and derivatives markets for several years.
What is more, by establishing new links between trading venues, clients’ internal systems and third-parties – such as clearinghouses – the entire trade cycle can be streamlined.  This improves price discovery, makes execution more efficient, and speeds up trade processing and reporting functions. Buy-side investors can also access real-time analytics or transaction cost analyses that can be used to monitor performance.
 
Greater use of technology can simplify and improve trading processes immensely. One clear example of this concerns the requirement that, in some jurisdictions, derivatives trades must be cleared. This has created a need for swaps users to efficiently manage an increased number of clearinghouse line items, where each outstanding transaction increases costs and risk. While netting or terminating this risk can be done manually, it is an incredibly time-consuming and inefficient process.
 
Electronic trading platforms however, can offer efficient mechanisms for executing offsetting swap trades to eliminate these line items. In Europe, for example, this functionality is now increasingly being used by traders, even ahead of mandated clearing.
 
There will be plenty of opportunities for further innovation from execution venues while market structure, client behaviour and regulation continue to evolve across Asia and throughout the rest of the world.
 

Andrew Bernard is the head of Asia, Tradeweb 

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