South African Reserve Bank: Mandatory Central Clearing Rules for OTC Derivatives by 2028

• South African regulators plan to finalize new rules for over-the-counter derivatives by 2028.
• The proposed rules will require market participants to centrally clear certain OTC derivative transactions, improving transparency and reducing risk.
• Regulators have proposed that rand-denominated interest-rate swaps and forward-rate agreements be the first instruments subject to mandatory central clearing.

By centralizing and standardizing the clearing of certain OTC derivative transactions, the system will become more transparent and resilient to shocks, contributing to the stability of the financial system.

South Africa's financial regulators are on track to finalize new rules for over-the-counter (OTC) derivatives by 2028, marking a significant step towards improving transparency and reducing risk in the market. The Prudential Authority and Financial Sector Conduct Authority have been working together to develop a joint standard and draft determination that will outline the products subject to mandatory central clearing and eligibility criteria. This regulatory framework is expected to be published between April 2027 and March 2028, allowing market participants to prepare for compliance with the new rules.

The proposed rules aim to address concerns around counterparty risk, which has been a major focus of global regulators in recent years. By centralizing and standardizing the clearing of certain OTC derivative transactions, the system will become more transparent and resilient to shocks, contributing to the stability of the financial system.

The new rules are expected to have a significant impact on the OTC derivatives market in South Africa, which is valued at over R150 trillion ($9.3 trillion). The market currently consists of rand-denominated interest-rate swaps and forward-rate agreements, but additional derivatives will be identified through a phased and structured approach informed by industry feedback and market-data analysis. Regulators have proposed that these instruments be the first to be subject to mandatory central clearing, with further products to be considered in due course.

The introduction of mandatory central clearing is expected to lead to increased transparency and reduced risk in the market, making it more attractive to investors and reducing the likelihood of counterparty failure. However, market participants will need to comply with the new rules, which may require significant changes to their existing operations.

The regulatory framework for OTC derivatives in South Africa is governed by a range of laws and regulations, including the Financial Sector Regulation Act and the Financial Markets Act. The Prudential Authority and Financial Sector Conduct Authority have been working together to develop a joint standard and draft determination that will outline the products subject to mandatory central clearing and eligibility criteria.

Regulators globally have been undertaking financial market reviews to reduce the risk of counterparty failure, and South Africa has adopted a phased roadmap in 2022 to implement a mandatory central clearing framework for OTC derivatives. The proposed rules are consistent with Group of Twenty commitments and aim to improve transparency and reduce risk in the market.

Lawyers should watch for the upcoming joint standard and draft determination from the Prudential Authority and Financial Sector Conduct Authority, which will outline the products subject to mandatory central clearing and eligibility criteria, as this may impact their clients' compliance obligations.

Source: Original reporting via Bloomberg