Clinton van Loggerenberg and Kelle Gagné of ENSafrica looks at Over the counter (“OTC”) derivatives
South African regulators are developing regulations in compliance with G20 undertakings, which will require, among other things, that certain classes of “standardised” derivative contracts be cleared centrally. Similar legislation is being developed in the EU and the USA. The G20 believe that centralised clearing will reduce systemic risk and knock-on failures of the type seen when Lehman Brothers defaulted.
On 5 June 2015 National Treasury released the second draft regulations under the Financial Markets Act. The second draft regulations take into account a multitude of comments received during the initial consultative process.
The draft regulations are extensive and cover everything from the role and function of the central clearing house, to capital requirements, collateral rules, record keeping and much in between.
The second draft regulations also provide clarification in respect of the recognition of external central securities depositories, external central counterparties and external trade repositories. In addition, capital, assets and resource requirements for central counterparties have been significantly refined. The functions of a central counterparty have been clarified. For example, in the principal to principal clearing model, collateral from clients of clearing members will no longer be collected by the central counterparty since such clients’ obligations are to the clearing member.
A number of matters will now be dealt with in board notices rather than the regulations (for example, the regulations applicable to the licensing of trade repositories).
Finally, the time period for compliance with the regulations under the transitional arrangements has been extended from six months to 12 months.
These draft regulations could significantly impact on the OTC derivatives market in South Africa and warrant careful consideration. The deadline for comment on the second draft regulations is 6 July 2015.
A copy of the draft regulations can be found here.
Clinton van Loggerenberg