Member Article

The draft regulations for OTC derivatives have been released, which means that change is in the air. The government is stepping forward into unchartered territory and is set to regulate an area which has never been regulated before.

Following our recent breaking news on the draft regulations, ENSafrica will, over the coming weeks and months, unpack the regulations for you, highlighting all the essentials. What follows is a sneak peak at affected areas and a snapshot of the bigger picture.

Why should you care?

The bottom line is that the “Draft Regulations of the OTC Derivative Market” could fundamentally impact your business and anyone dealing within the OTC derivatives market may be affected. Particularly, OTC Derivatives Providers will be affected if the Regulations come into force. The draft Regulations are far reaching, and have significant implications, so it is best to take a look.

Are you a Provider?

An OTC Derivatives Provider is most likely a bank, a financial institution, or any other derivatives market participant who regularly trades in derivatives. Providers will need authorisation to continue with business, will be obliged to report all trade data to a licenced trade repository, and may have to clear all transactions through a central counterparty.

Not sure if this applies to you? The draft Regulations are widely worded, and apply vaguely to all OTC Derivative Providers. However, no definition of an OTC Derivative Provider has been included. Nevertheless, the draft Regulations hint at a range of penalties from the Financial Markets Act if one fails to comply.

What about a trade repository?

A trade repository is someone who collects data on OTC derivative transactions, collates such data and reports it to regulators, as may be required. Under the draft Regulations, a trade repository will be required to have clear rules, procedures and contracts – enforceable in all relevant jurisdictions – which balance the competing interests of access and disclosure to users and confidentiality. The draft Regulations impose fairly onerous obligations on trade repositories, and ensure that they remain deferential to the powers of the registrar.

What is the aim?

The draft Regulations aim to get a handle on the OTC derivatives market, and limit the possible repercussions of unforeseen events. The Regulations deal extensively with the establishment of a central counterparty, including significant liquidity requirements. The essence of this is that it is likely that OTC Derivative Providers will be called on to provide such liquidity by posting margin and paying membership fees. If so, this is likely to increase the cost of doing business.

So what now?

The reach of the draft Regulations is wide, and so it is important to take a look if you deal with the derivatives market in any way. The draft Regulations still need to be developed in many areas, but it is worth noting that the consequences of non-compliance will be high. For this reason it is important to assess where and how your business may be impacted. There is an opportunity to comment of the proposed regulations until 3 September 2014, by emailing [email protected], with the subject title FMA: Ministerial Regulations.

The draft Regulations can be accessed at: http://www.treasury.gov.za/public%20comments/OTC/.

For further information, please contact:

Clinton van Loggerenberg

banking and finance director (ENSafrica)

+27 82 526 2888

[email protected]

Kelle Gagné

banking and finance foreign legal counsel - admitted in New York

+27 82 853 4312

[email protected]

 

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