SA plans otc derivatives market shakeup to curb risk

South Africa’s financial watchdog is preparing new rules for the over-the-counter derivatives market that will require certain products to be cleared by a central counterparty to improve transparency and reduce risk.

Those products may include interest-rate or foreign-exchange swaps, or other derivatives such as repurchase agreements and forwards, Financial Sector Conduct Authority Commissioner Unathi Kamlana said in an interview. “That work is on the way, and it’s going to be consulted on by the industry.”

The regulator also wants to tighten capital requirements for non-bank OTC derivatives providers, the commissioner said, adding that the changes could be implemented within the next three years

Regulators globally have been undertaking financial market reviews to reduce the risk of a damaging counterparty failure. The review process in South Africa started seven years ago. At the time, a banking study found the outstanding balance of the country’s OTC derivatives market stood at R44.7 trillion ($2.6 trillion).

Removing arbitrage

To date, South Africa has licensed one central counterparty for derivatives trades — JSE’s clearing house, JSE Clear — and designated Strate as a repository to keep track of transactions and support regulators in monitoring systemic risk.

The proposed reforms will also bring non-bank over-the-counter derivatives providers in line with their more heavily regulated banking peers, “so that for similar risks you get similar treatment from a capital point of view,” Kamlana said.

The non-banking players will need to review capital buffers and stress test risk frameworks as they prepare for a more stringent prudential environment, he said. “We don’t want arbitrage so that riskier trades are done outside the banking sector because we have a capital framework that is weaker in the non-bank space.”

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