MAS requires over-the-counter derivatives trades to be centrally cleared

Banks with $20b OTC derivatives will be required to clear their trades through regulated counterparties.

The Monetary Authority of Singapore (MAS) will require over-the-counter (OTC) derivatives to be cleared on central counterparties (CCPs) starting 1 October 2018. "Central clearing will make the trading of OTC derivatives in Singapore safer as it mitigates counterparty credit risks inherent in these trades," it said in an announcement.

A central counterparty is an entity that imposes itself between counterparties to contracts traded in one or more financial markets, becoming the buyer to every seller and the seller to every buyer and thereby ensuring the performance of open contracts.

Previously, MAS proposed to require the trading of OTC derivatives on organised markets. The limit was supposed to cover the most globally-traded OTC derivatives, namely interest rate swaps denominated in US dollar, Euro, and Pound Sterling to be traded on organised markets like exchanges or other centralised trading facilities.

The mandatory clearing requirement will apply to Singapore dollar and US dollar fixed-floating interest rate swaps as these are the most widely traded interest rate derivatives in Singapore, MAS said. "Banks whose gross notional outstanding OTC derivatives exceed $20b will be required to clear their trades through CCPs that are regulated by MAS. These banks account for over 90% of OTC derivatives contracts (in terms of outstanding notional amount) in Singapore," it added.

MAS capital markets assistant managing director Lee Boon Ngiap commented, “The central clearing requirements complement the existing margin requirements for noncentrally cleared OTC derivatives. Both requirements work together to reduce systemic risk in Singapore’s OTC derivatives markets, in line with the G20’s and Financial Stability Board’s set of reforms on OTC derivatives."

The central clearing requirements will be effected through the Securities and Futures (Clearing of Derivatives Contracts) Regulations.