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RPT-US regulation may prompt iron ore swaps volume migration
November 5, 2012 / 10:20 AM / 5 years ago

RPT-US regulation may prompt iron ore swaps volume migration

5 Min Read

* CME could benefit from regulation

* SGX cleared record iron ore volumes of 17.7 mln in Sep.

* SGX says intends to register with the CFTC

By Silvia Antonioli and Manolo Serapio Jr

LONDON/SINGAPORE, Nov 2 (Reuters) - New regulation is likely to deter U.S. investors in iron ore swaps from using the Singapore Exchange, the leading clearer of the product, scattering business to other exchanges and reducing liquidity in this fledgling market.

This could be concerning for the young but fast-growing iron ore derivatives market which has only recently started to attract more U.S.-based hedge funds.

U.S. regulator The Commodity Futures Trading Commission (CFTC) has taken the position that all clearing houses that clear swaps for U.S. customers must be registered with the CFTC as designated clearing organisation (DCO).

As the Singapore Exchange (SGX) has not registered, the CFTC advised that U.S. customers were not permitted to add any new positions on SGX AsiaClear, starting from Oct. 15 2012, brokers said.

Brokerage Newedge told its employees about this prohibition, in an email seen by Reuters.

"U.S. customers will not be permitted to add any new positions on SGX AsiaClear; however, such customers will be able to maintain or liquidate existing positions entered into prior to October 15, 2012," Newedge's compliance notice said.

"This prohibition relates to all U.S. customers of Newedge, regardless of the affiliate in which such customers are booked."

Contacted by Reuters several times the CFTC was not available for comment and Newedge declined to confirm the content of the email or to comment its subject.

"SGX intends to be a Derivatives Clearing Organisation registered with the CFTC... We are working with the relevant regulators to complete this as soon as possible," a spokeswoman for SGX said.

"The CFTC has meanwhile said it is granting no-action relief to SGX iron ore swaps clearing customers for current positions held with the SGX derivatives clearing house, and will not require our customers to liquidate their positions. We continue to be in discussions with the CFTC with the intention of delivering to our customers, products relevant to the post Dodd-Frank environment."

Market players estimated U.S. customers currently account for about 10 percent of the iron ore swaps volumes cleared by the SGX but some among them, especially the banks, have UK-registered entities which are not affected by the CFTC regulation.

The customers affected are mainly U.S.-registered trading houses and funds, they said.

Swap the Exchange

SGX began offering clearing services for iron ore swaps in April 2009 and volumes hit a record high of 17.7 million tonnes a month in September this year.

The Asian exchange currently clears over 90 percent of the global iron ore swaps trade but other clearers who offer iron ore contracts and are already registered as a DCO could benefit from this regulatory development.

Among them is the U.S.-based CME group, which had already gained relevance as a major iron ore options clearer in the last few months.

A UK-based broker said at least 2 of its U.S. customers have already advised they will not open new positions on SGX and will use instead the CME services.

Whether all the other U.S. customers will follow suit is still not clear.

"No one is sure how to interpret this stuff. We are not quite as aggressive with our interpretation as Newedge was but I am not comfortable at all with the situation," a source at a bank said.

"It's definitely a worry. This is a bigger issue obviously than just iron ore and a lot of people have just no idea of what is coming in the U.S. I think this could affect some liquidity (on SGX) and the Chinese don't trade on the CME. It's not good."

Some brokers though think the impact of the regulation will not be quite as dramatic now that liquidity has increased in iron ore swaps market, and others say they will continue to operate with U.S. customers on SGX.

"The pool of liquidity on SGX is large enough that I should think U.S. customers should make a genuine effort to ultimately go back to it rather than switch their volumes to CME," a Singapore-based broker said.

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