OTC Derivatives Reforms and the Australian Cross-currency Swap Market

Ivailo Arsov, Greg Moran, Ben Shanahan and Karl Stacey
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Ivailo Arsov: Reserve Bank of Australia
Greg Moran: Reserve Bank of Australia
Ben Shanahan: Reserve Bank of Australia
Karl Stacey: Reserve Bank of Australia

RBA Bulletin (Print copy discontinued), 2013, 55-64

Abstract: Reforms to improve the management of counterparty credit risk in over-the-counter (OTC) derivatives markets are underway globally. A key pillar of the reforms is the migration of these markets to central counterparties (CCPs), while higher capital charges and increased collateralisation will apply to derivatives that remain non-centrally cleared. One class of OTC derivatives that could be significantly affected by these reforms are cross-currency swaps. These instruments are particularly important to the Australian financial system because Australian banks raise a significant proportion of their funding by issuing foreign currency bonds in offshore markets and using cross-currency swaps to hedge the associated foreign exchange (FX) risk. No CCP yet offers a central clearing solution for cross-currency swaps, which means that Australian banks will continue to manage counterparty credit risk in this market on a bilateral basis for the time being. Regardless of whether cross-currency swaps are centrally or non-centrally cleared, it is important when implementing the reforms in this market to examine how market participants will adjust to the new environment.

Keywords: OTC derivatives; Regulatory reform; Counterparty credit risk; Central clearing; Offshore funding; Foreign exchange rate risk; Hedging; Cross-currency swap (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (7)

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