US still has no plans to give Asian sovereigns Dodd-Frank exemption, says Hong Kong regulator

Asian countries are concerned about the lack of Dodd-Frank Act CCP exemptions for sovereigns; proliferation of CCPs carries its own risks, say dealers

US regulators are showing no signs of relaxing Dodd-Frank Act rules that will force Asian and European central banks and sovereign-sponsored entities to transact derivatives via central counterparties (CCPs) and trade repositories, when conducting business with US banks. By contrast, the US Federal Reserve and US Treasury have already received exemptions from such requirements.

The move has caused uproar in Asia and Europe, but Esmond Lee, executive director in the financial infrastructure department at the Hong Kong Monetary Authority (HKMA), told a Hong Kong Treasury Markets Association forum last night there are no signs yet of a US climb down.

"One of the [Dodd-Frank] exemptions, according to US colleagues, is for the Federal Reserve, US treasury and the Federal Reserve Bank of New York. This has caused concern among Asian and European colleagues," says Lee, who had just returned to Hong Kong from a Basel Committee on Banking Supervision meeting on payments and settlement systems. "It means the Bank of England, ECB, HKMA and MAS [among others] will be non-exempted from Dodd-Frank. So, if dealing with a US entity, all these transactions will be centrally cleared and reported to a trade repository."

Should this rule hold, Asian sovereign entities could be required to post collateral on trades – something few, if any, do at present. In addition, it is likely their transactions – some of which are considered state secrets – would be observable via the trade repository.

However, many senior industry officials believe the rules in their current format would prove untenable for US banks and are likely to be watered down in the coming months.

An interesting analogy is the airline industry where 20 years ago every country wanted their own airline but today they all want to get rid of their own airline

The matter appears less pressing now that implementation of the Dodd-Frank Act has been delayed from July 16 this year until at least the end of the year, after the Commodity Futures Trading Commission (CFTC) and Securities and Exchanges Commission – the two main US regulators tasked with implementing Dodd-Frank – revealed they could not keep to the aggressive timetable laid out by US lawmakers.

Meanwhile, other speakers at the forum highlighted the fragmented nature of Asia's markets, and said there may be a danger that too many CCPs are being built for nationalistic reasons rather than sound business reasons.

"The interest rate swap (IRS) market [in Asia] occupies 8% of the global market, and half of that is in Japan – so then there is 4% across four or five CCPs. You wonder whether they will all survive in the long term," says Shane Berkley, head of operations at JP Morgan in Hong Kong. "An interesting analogy is the airline industry, where 20 years ago every country wanted their own airline but today they all want to get rid of their own airline."

Stuart Billingham, a director of Asia Pacific sales at middleware provider MarkitServ, says he is currently engaging with seven companies across Asia that are setting up trade repositories or CCPs. The HKMA itself has ambitions to further enhance Hong Kong's reputation as an international financial centre by creating a trade repository by the end of 2012. Hong Kong will also have a CCP operated by Hong Kong Exchanges and Clearing. It expects to have its regulatory framework established in early 2013 once the infrastructure is in place, according to Lee.

The HKMA official adds that the trade repository will eventually be widened to cover all OTC products whether standardised or non-standardised, and functionality will be widened to include collateral and valuation. "Phase 2 of our trade repository project will probably include widening of product coverage, increasing functionality and promoting it to other banks outside Hong Kong," says Lee. "So while our mandatory requirements don't cover that, these are value-added services...to become a genuine regional or even international trade repository."