Asia's new clearing houses risk sitting idle

Money being poured into central clearing houses for derivatives in Asia may be headed down the drain, with banks and brokers unwilling to sign up due to the costs and complexities involved. Exchanges across Asia, encouraged by the regulators, have embarked on a plan to launch clearing services for derivatives that are traded over-the-counter.
Many of those projects, however, may be doomed to fail, as it becomes apparent that the nascent state of the derivatives market in the region can only support a limited number of players and even they won't find it easy to draw clients.
"World-wide, the view is there's room for around five or six clearing houses, the rest will struggle or have a niche market," said Laurent Cunin, Asia-Pacific head of brokerage Newedge in an interview with Reuters.
The Singapore Exchange is already clearing interest rate swaps and some foreign exchange forwards, while Hong Kong, South Korea, Japan, China and India are all in the process of launching financial OTC derivative clearing services.
The moves follow the commitment by the Group of 20 leading economies to have all standardised OTC derivatives centrally cleared. The aim is to prevent a repeat of the aftermath of the collapse of Lehman Brothers in 2008 when a large number of its derivative trades were not completed, inflicting big losses on its counterparties. But establishing a central clearing house is not cheap and there are doubts if all of the new entrants will be able to turn a profit.
"It comes down to cost, and if you don't have enough large players (using the service) there is going to be a disproportionate cost," said Alberto Pravettoni, managing director of commercial services for LCH.Clearnet Group, the world's largest independent clearing house for interest rate swaps, at a recent Futures Industry Association (FIA) conference in Singapore.
The cost of running a clearing house varies, depending on the size of the market it clears and the variety of products it handles, but at a minimum they are likely to cost tens of millions of dollars. Hong Kong Exchanges and Clearing has said it will invest an initial HK$180 million ($23.13 million) in its new project.
While Asia's share of the $600 trillion global OTC market is likely to grow in the coming years, at the moment it stands at around 15 percent, according to financial services technology company Celent.