Over the Electronic Counter
We are reading all about it these days – central clearing and exchange trading of over the counter (OTC) products – and Asia is no exception. We know that all products aren’t eligible to be traded on an exchange given the bespoke nature of some of these assets. There is some discussion on whether their should be one mammoth “can’t fail” Clearing House that should bare all the counterparty risk or that interoperability amongst CCPs is the way forward. And of course, how do you quote a fair market to trade products that often have only 1 buyer and 1 seller globally? Despite these hurdles electronic OTC is here and steadily gaining momentum.
Asia hasn’t had the benefit of western financial engineers running amuck concocting all manner of OTC derivatives but we do have a voracious appetite for commodities. To that end the Singapore Exchange’s (SGX) AsiaClear was launched May 2006 as Asia’s first OTC clearing platform. They provide central counterparty clearing for OTC oil swaps and forward freight agreements 20 hours per day. Participants register trades electronically in what they call the Trade Registration System (TRS).
There is a little know bourse called the J-Oil Exchange also based in Singapore that engages in electronic OTC trading as well. While they don’t actually provide a CCP service (bilateral) their Trader Members can trade online an assortment of standard energy products. The trading platform is provided by Trayport known for their stranglehold on OTC energy exchanges in Europe. Trayport recently added Ginga Petroleum, a coal swap broker, to their list of clients who are moving toward electronic OTC. The automation of OTC trading will certainly be a boon to vendors and clearing houses alike.
Singapore, while (much) further ahead than the rest of Asia, isn’t the only one moving to central clearing of OTC products. June 30 of this year the Japan Securities Clearing Corporation (JSCC) announced that they too had decided to offer this kind of service to the industry. It is expected to commence mid 2011.
Hong Kong Securities Clearing Company began clearing OTC Structured Products April 26 with a limited number of issues and expects to develop this business in the near future. The Hong Kong Mercantile Exchange, while not operating as of yet, will use LCH.Clearnet to clear its trading business. Initially, trading won’t be in OTC derivatives but the HKMEx is paving the way for an OTC business in the future.
While the focus on electronic OTC clearing in Asia has largely been in commodities its only a matter of time until the full gambit of derivatives move from the traditional bilateral business on to some platform or other. It is likely that each Asian country will remain with the large “can’t fail” CCP model and interoperability is off the table. If Europe can’t do it don’t expect Asia to.