SwapClear cleared for OTC derivatives

The Federal Government has approved SwapClear, LCH Clearnet's clearing and settlement facility, to directly clear over-the-counter (OTC) interest rate derivatives in Australia.

The Parliamentary Secretary to the Treasurer, Bernie Ripoll, also approved the facility as a netting market for the purposes of the Payments and Netting Act 1998.

The Government said clearing houses reduced risk in financial systems by managing counterparty risks, while improved access to central clearing would lessen potential risks associated with existing client transactions, encourage the clearing of interest rate swaps by Australian market participants, and promote competition in clearing services.

"The approval of this licence variation will promote greater competition and foreign participation in the Australian financial market, place downward pressure on fees, and provide critical market services directly to Australian market participants," Ripoll said.

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SwapClear will initially be licensed to clear OTC interest rate derivatives, but it expressed interest in offering additional services to the derivatives market and the Financial and Energy Exchange Global (FEX) market, the first non-ASX clearing house licensed by the Government in April.

In February, then Treasurer Wayne Swan said decisions to grant clearing and settlement licences would be deferred for two years due to timing, market conditions and the magnitude of regulatory change, based on the advice of the Council of Financial Regulators.

At the end of last year, the Association of Superannuation Funds of Australia (ASFA) remained unconvinced of the benefits of introducing clearing competition, due to potential issues arising with the management of super fund assets and liquidity.