South Korean Government Approves Central Clearing

Seoul has mandated the use of CCPs for certain derivatives, in line with global efforts.

The South Korean Financial Services Commission (FSC) has announced that central counterparty clearing houses (CCPs) will be mandated for certain over-the-counter (OTC) derivatives transactions.

The Legislation and Judiciary Committee of the National Assembly passed the revision bill on the Financial Investment Services and Capital Markets Act (FSCMA) earlier today. The move brings South Korea in line with Group of 20 (G20) agreements around risk mitigation in OTC derivatives trades, and mirrors similar efforts by other regulators around the world.

CCPs essentially stand in between trades, guaranteeing each side in the case of counterparty default. Instruments that present a significant risk in the case of default will be required to clear through CCPs, with interest-rate swaps (IRS) being named as definitively under the regime due to their widespread use.

The FSC did not comment directly on the development in its announcement, but said that any CCP would begin operations within three months of the FSCMA's enactment. The Korea Exchange (KRX) is currently preparing a clearing house for approval when FSCMA takes effect, while clearing business operators will be authorized depending on the instruments they deal with. The OTC derivatives market in South Korea totalled around $632 billion by the end of 2011.

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