Futures exchange brings CCP clearing to Aussie debt

SFE Clearing, the clearing and settlements arm of Sydney Futures Exchange (SFE), has announced the launch of its new Bond and Repo Clear service (BRC), with over $24 billion in trades settled in the first two weeks of trading with a pilot group.

Although both the US and UK have similar systems, BRC is the first implementation of central counterparty clearing for the over-the-counter debt market in Australia and the Asia Pacific region, and only the fourth in the world.

Traditionally the wholesale market has settled transactions directly between the two parties involved in the trade, with bonds delivered against receipt of cash via a central securities depository (CSD). With BRC, SFE Clearing becomes the counterparty to each trade, mitigating risks to the trading parties and reducing the amount and number of settlements, as purchases and sales, repos and reverse repos are netted.

This netting is done on a multi-lateral basis from the perspective of a market participant. So if one bank dealt with five other participants in the course of a trading day, these contracts between buyer and seller would be replaced with just one, between the bank and the central counterparty. Research shows that the market's payment obligations can be reduced by between 20% and 95% through the use of netting, depending on the size of the market. The SFE says it expects the total value of obligations to continue to decrease as its BRC pilot is expanded

"BRCÆs successful implementation speaks volumes for the pro-active approach of the Australian financial community and in particular the major trading and investment banks that have supported the project from inception," says Robert Elstone, CEO and Managing Director of SFE Corporation.

BRC will have a fundamental impact on the trade and settlement process in Australia and the Asia Pacific region, by providing customers with cost and credit efficiencies previously available to futures markets only. To assume and manage the risk associated with acting as a counterparty to every transaction the SFE had created a guarantee fund for futures clearing and this fund is now being supplemented by those market participants who are also taking part in the BRC.
 
"The project was financed by the SFE and was a full year in development and testing," says Martin Stockley-Smith, general manager of SFE Clearing. "It involved the introduction of new systems and processes, further utilising SFE ClearingÆs Austraclear CSD, and meeting of the most stringent of regulatory requirements.  This experience in product and system development has now positioned SFE Clearing to cover additional OTC products and launch a wider range of services both in Australia and overseas," he adds. What these additional products might be, and what other countries the SFC targets, have not been decided yet, but the SFC says it will depend entirely on what market demand dictates.