Korea to miss OTC clearing deadline
South Korea is set to miss the deadline to start clearing derivatives through a central counterparty (CCP) by the start of 2013 because of delays in passing new legislation to formalise central clearing through parliament.
At the Pittsburgh summit in 2009, Group of 20 leaders first announced that “all standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest.” This commitment was reaffirmed at the Seoul summit in November 2010.
But according to Warren Park, senior analyst at Hana Institute of Finance in Seoul, the CCP-related law has not yet been passed because it has been included as part of the revised Financial Investment Services and Capital Markets Act (FISCMA), which has been awaiting ratification by the national assembly for over a year.
“It’s not entirely clear why the Act hasn’t been passed, but it is most likely due to opposition to the Act’s inclusion of regulations to develop investment banking and hedge funds – at a time when advanced economies are trying to shrink those sectors – rather than opposition to the CCP-related law, which doesn’t seem to be facing any opposition at all,” he says.
Park says that given the upcoming Korean presidential election on December 19 diverting the attention of assembly members, it seems “highly unlikely” that the revised FISCMA will be passed by the end of the year. “As such, the CCP will have to wait until 2013 and even then, it’s not clear what will happen,” he says.
Seok-ho Jung, senior vice-president in the derivatives market division at the Korean Exchange (KRX) in Seoul, admits that legislative delays have hampered the implementation timetable for clearing in Korea. “We hope the law will be revised at the end of this year and implementation of central clearing will start next year but I can’t say it will start in January. I can’t give a concrete starting point,” he says.
Market participants say they have taken operational steps in preparation for central clearing but that the clearing house may not be in the same position. “We can’t make the due date of January 2013 because KRX’s CCP to clear OTC products hasn’t gone live yet. There will be a test period in October but we are not sure when it will go live,” says Hyewon Jung, head of operations at Macquarie Bank in Seoul.
The first product that is set to be cleared in Korea is won-denominated interest rate swaps. According to statistics from the Bank for International Settlements, in April 2010, interest rate derivatives in Korea represented 0.4% of the global market and amounted to $10.7 billion per day.
In contrast to Korea’s difficulties, its bigger neighbour Japan has already started successfully clearing yen interest rate swaps.
This article was first published on Risk