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OTC Derivatives Reforms and the Australian Cross-currency Swap Market

Author

Listed:
  • Ivailo Arsov

    (Reserve Bank of Australia)

  • Greg Moran

    (Reserve Bank of Australia)

  • Ben Shanahan

    (Reserve Bank of Australia)

  • Karl Stacey

    (Reserve Bank of Australia)

Abstract

Reforms to improve the management of counterparty credit risk in over-the-counter (OTC) derivatives markets are underway globally. A key pillar of the reforms is the migration of these markets to central counterparties (CCPs), while higher capital charges and increased collateralisation will apply to derivatives that remain non-centrally cleared. One class of OTC derivatives that could be significantly affected by these reforms are cross-currency swaps. These instruments are particularly important to the Australian financial system because Australian banks raise a significant proportion of their funding by issuing foreign currency bonds in offshore markets and using cross-currency swaps to hedge the associated foreign exchange (FX) risk. No CCP yet offers a central clearing solution for cross-currency swaps, which means that Australian banks will continue to manage counterparty credit risk in this market on a bilateral basis for the time being. Regardless of whether cross-currency swaps are centrally or non-centrally cleared, it is important when implementing the reforms in this market to examine how market participants will adjust to the new environment.

Suggested Citation

  • Ivailo Arsov & Greg Moran & Ben Shanahan & Karl Stacey, 2013. "OTC Derivatives Reforms and the Australian Cross-currency Swap Market," RBA Bulletin (Print copy discontinued), Reserve Bank of Australia, pages 55-64, June.
    • Handle: RePEc:rba:rbabul:jun2013-07
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    File URL: https://www.rba.gov.au/publications/bulletin/2013/jun/pdf/bu-0613-7.pdf
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    References listed on IDEAS

    as
    1. Chris Becker & Daniel Fabbro, 2006. "Limiting Foreign Exchange Exposure through Hedging: The Australian Experience," RBA Research Discussion Papers rdp2006-09, Reserve Bank of Australia.
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    Cited by:

    1. Cerutti, Eugenio M. & Obstfeld, Maurice & Zhou, Haonan, 2021. "Covered interest parity deviations: Macrofinancial determinants," Journal of International Economics, Elsevier, vol. 130(C).
    2. Megan Garner & Anna Nitschke & David Xu, 2016. "Developments in Foreign Exchange and OTC Derivatives Markets," RBA Bulletin (Print copy discontinued), Reserve Bank of Australia, pages 63-74, December.
    3. Bank for International Settlements, 2020. "US dollar funding: an international perspective," CGFS Papers, Bank for International Settlements, number 65, december.
    4. Jon Cheshire, 2015. "Market Making in Bond Markets," RBA Bulletin (Print copy discontinued), Reserve Bank of Australia, pages 63-74, March.

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