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MAS to require central clearing of OTC derivatives from Oct 1

THE Monetary Authority of Singapore (MAS) will require over-the-counter (OTC) derivatives to be cleared on central counterparties (CCPs) with effect from Oct 1 this year, in a bid to make trading of such derivatives in Singapore safer.

The mandatory clearing requirement will apply to Singapore-dollar and US-dollar fixed-floating interest rate swaps as these are the most widely traded interest rate derivatives in Singapore, said MAS.

Central clearing mitigates counterparty credit risks as the CCP takes on that risk between parties to a transaction.

In addition, banks whose gross notional outstanding OTC derivatives exceed S$20 billion will be required to clear their trades through MAS-regulated CCPs. These banks account for over 90 per cent of OTC derivatives contracts in terms of outstanding notional amount in Singapore.

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MAS capital markets assistant managing director Lee Boon Ngiap said the new requirements complement the existing margin requirements for non-centrally cleared OTC derivatives.

"Both requirements work together to reduce systemic risk in Singapore's OTC derivatives markets, in line with the G-20's and Financial Stability Board's (FSB) set of reforms on OTC derivatives," he said in a statement.

The G-20 and FSB in 2009 agreed to implement a set of reforms in the OTC derivatives market to improve transparency, mitigate systemic risk and protect against market abuse.

MAS has been progressively implementing reforms in the areas of trade reporting, risk mitigation and margining of non-centrally cleared OTC derivatives, and now the mandatory clearing of OTC derivatives.