Absa successfully clears first South African over the counter derivatives trade

The corporate and investment banking division of Absa Bank Limited, a member of Barclays, became the first South African bank to clear a standardised over the counter (OTC) derivative trade via a globally recognised central counterparty (CCP). The trade,

Since the collapse of Lehman Brothers, global regulatory shifts, emanating initially from commitments made by G20 Leaders in 2009, have led to changes in how OTC derivatives are traded globally.

"Importantly, Lehman Brothers exposed significant problems in managing counterparty risk - along with the interconnectedness and opacity of the OTC derivatives market as a whole,” explains Stephen Linnell, COO for Equities and Prime Services at the Corporate and Investment Banking division of Absa.

“As such regulators are pushing to clear standardised OTC derivatives, report their transactions via trade repositories, and implement higher capital charges where such products are not cleared”, said Linnell.

South African regulators have responded proactively to these global trends, primarily through the passing of the Financial Markets Bill, but also through the adoption of Basel III in respect of banking supervision. Regulators along with industry participants are now working together to formulate the detail on the next level of implementation.

South Africa's OTC derivatives market, valued at about R 28 trillion as of June 2012, is comprised mostly of interest rate products. A substantial portion of transactions on these products involve a foreign counterparty. Domestic dealers use these foreign counterparties primarily to off-set risk exposures assumed from domestic non-bank financial institutions - such as insurance companies, asset management firms and corporates.

While today's successful trade makes Absa the first domestic bank to clear a standardised OTC via a CCP, others are close behind.

The big question going forward, is whether South Africa will establish its own local clearing house for OTC derivatives (as with Japan's Securities Clearing Corporation), or consolidate through global services such as LCH.Clearnet's SwapClear offering (as with the majority of banks in Australia, for example).

"Either way, what is important is that market fragmentation is limited and a two-tiered model between domestic and international participants is discouraged," concludes Linnell.