Trading in Asia’s over-the-counter (OTC) swaps market has ground to a near halt as dealers are sitting on the sidelines amid confusion over new derivatives trading rules for U.S. and Japanese banks, which are major players in the region.
The rules, effective on Thursday, require U.S. and Japanese banks to post collateral or ‘margin’ against OTC trades – a development that is set to dramatically increase the cost of trading in the $5 trillion global swaps market.
Traders and market insiders told Reuters some major banks in the region had halted dealing in a range of OTC derivatives products, including foreign exchange non-deliverable forwards (NDFs) and interest rate swaps, as they are not yet able to comply with the rules first proposed by global regulators in the wake of the 2008-2009 financial crisis.
“There is a lot of confusion,” said one interest rates trader in Singapore. “The margining is an issue. The big banks are covered under that rule, and some of them don’t yet have systems and the back-end documentation processes in place.”
The markets for Asian currency NDFs and interest rate swaps are “frozen at the moment” due to the new margining requirements said Jeffrey Halley, senior market analyst for foreign exchange broker OANDA in Singapore.
“Some counterparties don’t want to face U.S. and Japanese names, because they don’t want to have to be obliged to post initial margin…so the whole market’s a bit fragmented. As a result, it’s just come to a complete halt basically,” Halley said.