It’s difficult to talk in general terms about the derivatives market in Asia-Pacific. Looked at as a whole, derivatives turnover in the region has been growing, and that growth is expected to continue. But activity is concentrated in a few key trading hubs like Hong Kong – the venue for this year’s ISDA Annual General Meeting. A number of other jurisdictions are at much earlier stages of development, and need to establish strong legal and regulatory foundations to encourage further growth in local derivatives markets.
That might sound obvious, but it’s important. In a new ISDA survey of 480 derivatives market participants active in Asia-Pacific, published in this issue of IQ, the existence of a sound legal and regulatory framework was identified as one of the main factors in determining where to trade. In particular, certainty over the enforceability of close-out netting was highlighted as essential to the development of robust and efficient derivatives markets.
There has been recent progress towards achieving that in certain jurisdictions, but – as it stands – there is still ambiguity over how close-out netting will be treated in three of the region’s biggest economies and Group-of-20 members: China, India and Indonesia. Given the importance of close-out netting as a risk mitigant, we believe resolving this issue is the single most important step policy-makers can take to ensure the development of safe, efficient and liquid derivatives markets in their jurisdictions.
The survey highlighted the importance of other regulatory issues, including the cross-border harmonization of rule sets. This has long been a key strategic priority for ISDA, and we recently proposed a set of recommendations to help mitigate fragmentation in global derivatives markets. Central to this is the development of a risk-based framework for comparability evaluations, alongside a predictable and consistent equivalence and substituted compliance process that is focused on outcomes.
Greater consistency between national rule sets would also help, but that doesn’t mean rules necessarily need to be identical in every market. For smaller jurisdictions or those with limited market activity, it may not be appropriate to implement the same rules as those applied in the US and Europe – at least, not at this stage. The most effective strategy for local regulators would be getting those legal foundations in place first.