Friday June 11 2021
News Source: Global Exchanges
Focus: Clearing & Settlement
Type: General
Country: Korean Republic
On 6th June 2021, the Korea Exchange (KRX) announced that it has amended its OTC Derivatives Clearing and Settlement Business Regulation as of 9th June 2021; approved by the Financial Services Commission (FSC) in a bid to provide the legal basis for introducing the trade compression service. This rule change is in line with the FSC’s ‘Outline Plan on the Development of Derivatives Market to Boost Innovative Growth and Support the Real Economy’ (published on May 30, 2019).
Trade compression is the practice of reducing the volume of cleared transactions by terminating the contract or changing the contract amount on a multilateral basis before the maturity.
The OTC derivatives contracts are not standardized and therefore hard to be netted between the transactions. Thus, the outstanding positions continued to increase as the new contracts accumulated, resulting in lower risk management efficiency and limits to establishing new positions
The trade compression through a central-counterparty (CCP) is expected to result in risk mitigation4), as the overall notional value and the number of cleared transactions including interest rate swaps(IRS) are reduced, more availability of capital for investment to Member Firms, and improved back-office efficiency.
The specifics regarding the trade compression will be provided in the Enforcement Rules of OTC Derivatives Clearing and Settlement Business Regulation which is to be amended in the following months. Relevant system development and associated tests with the Member Firms will be conducted and the actual compression aims to take place within this year.
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