Australia’s Council of Financial Regulators (CFR) conducted a public consultation on the case for central clearing of bonds and repurchase agreements (repos) in the country. The consultation sought views from respondents on a range of related issues including: (i) the costs and benefits of central clearing in these markets; (ii) market functioning and financial stability considerations; and (iii) issues related to a prospective service being provided from overseas. This paper provides the CFR’s response to the public consultation.
The CFR agrees with respondent feedback that the introduction of central clearing could enhance the efficiency and stability of the Australian bond and repo markets. The CFR supports the industry exploring the introduction of central clearing in the Australian bond and repo markets where the benefits are likely to outweigh the costs. The CFR does not consider there to be a compelling case for regulatory intervention to introduce central clearing in these markets at this time. Prospective operators will need to manage several challenges as part of the design of a bond and repo central counterparty (CCP).
These include attracting a critical mass of participants and the timing of development and go-live of any service to ensure it is safe and successful. The CFR expects a bond and repo CCP to be well-supported by the industry and viable in the long term. An unsuccessful CCP is unlikely to be beneficial for market development, efficiency, financial stability or the Australian economy.
Feedback from some respondents indicated that previous statements from the CFR agencies have been interpreted as a blanket “domestic location requirement” for the central clearing of bond and repos in Australia. The CFR does not have a blanket domestic location requirement for the central clearing of bond and repos in Australia. The decision to grant (or not to grant) a clearing and settlement (CS) facility license will be determined on a case-by-case basis. This would involve consideration of all the facts and circumstances relevant to the CS facility, including its participants and the functioning of Australian bond and repo markets.
The CFR notes respondent feedback around the efficiency and resilience of the Australian bond and repo markets, which are viewed by participants as broadly efficient and resilient. Market transparency and challenges associated with settlement chains have been identified as areas where efficiency could be enhanced. The CFR’s view is that there are opportunities for improvement that the industry could explore without the need for regulatory intervention. The CFR strongly encourages industry members to work together to identify and implement initiatives designed to improve transparency and settlement efficiency.