ISDA Chief Executive Officer Scott O'Malia offers informal comments on important OTC derivatives issues in derivatiViews, reflecting ISDA's long-held commitment to making the market safer and more efficient.

Last week at our Annual General Meeting (AGM) in Hong Kong, we published the results of a new ISDA survey that highlighted the potential for growth in Asia’s derivatives markets. The region’s share of global trading in both FX and interest rate derivatives is widely expected to increase, with Singapore and Hong Kong being the largest regional hubs.

The survey also underscores that this growth depends on a sound legal and regulatory framework. This means, in particular, ensuring the enforceability of close-out netting. Netting, which allows parties to combine their obligations into a single net payment in a default scenario, was ranked as the most important factor that will determine the future pace of growth of derivatives trading in Asia. That’s because of its critical importance in mitigating credit risk.

Three of the fastest growing emerging markets in Asia – China, India and Indonesia – do not yet have legal certainty on netting, so there is clearly work to be done on this front. We will continue to make the case for netting and to make sure that legislators have all the support and resources they need to make progress. To that end, at the AGM, we launched our latest whiteboard animation, which explains how netting works and why it contributes not only to safe and efficient markets but also to sustainable economic growth.

We’ve seen some encouraging signs, with Chinese, Indian and Indonesian authorities taking their own individual steps towards recognition of netting in recent years. Those three countries could be in the top five global economies by 2030, according to economists’ estimates, so we are very keen to make sure the progress continues.

This is not a new initiative for ISDA; we have been working with authorities all around the world for more than 30 years and have so far published netting opinions on more than 70 countries. In October 2018, we published an update to the Model Netting Act, which provides a template for legislation that can be applied to markets where netting is not yet recognized.

Our efforts extend far beyond the largest markets, with constructive efforts also underway in numerous frontier markets including Saudi Arabia, Bahrain, Vietnam, Ghana, Nigeria, Panama and Latvia. In each country, we take the same methodical approach, working with local legislators to overcome the unique challenges that exist.

As our survey shows, this is an incredibly exciting time for derivatives markets in Asia, and I felt this excitement first-hand at the AGM. Trading volumes are growing faster than global averages, infrastructure is developing and, gradually, progress is being made on netting. ISDA is working to maintain the momentum, so that the full growth potential can be unlocked across the region.

To read the Asia-Pacific Derivatives Survey, click here.

To watch the whiteboard animation on close-out netting, click here.

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