ASX recently hosted two industry associations for a joint conference in Sydney to discuss what the future of financial markets might look like.

Welcoming participants, Fiona Tramontana, General Manager of Rates at ASX, noted that the International Swaps and Derivatives Association (ISDA) and Australian Financial Markets Association (AFMA) assist regulators to set investment protocols and standards. This enhances Australia’s status as a global financial centre.

Both bodies also work with ASX, which operates one of the world’s top-four interest rate futures markets, and offers a suite of liquid equities and energy derivatives to manage borrowers’ exposures and risks.

Next steps for benchmarking reform

The conference occurred amid historic changes to global interest rate benchmarking, designed to stabilise the price of derivatives, loans, bonds and other products. Participants lauded Australia for successfully transitioning away from a majority of London Interbank Offered Rates (LIBOR) settings by the end of 2021, as required by global regulators.

ISDA protocols were cited by one speaker as a ‘roaring success’ in providing financial institutions with guidance to amend existing swap contracts. However, a large volume of US-dollar LIBOR contracts still need to be transitioned across the Asia-Pacific region. Australian banks also face a challenge to reprice cash loans, using legally robust contractual fallback arrangements. 

A key role for ASX

ASX is set to play an even greater role as markets explore the use of risk-free rates. Over the last five years, it has independently calculated, published and overseen the Bank Bill Swap Rate (BBSW), which is used to price Australian-dollar derivatives and securities. “The underlying bank bill market that we use to form BBSW remains highly liquid and an actively traded market,” said Kristye van de Geer, Senior Manager for Interest Rate Products at ASX. 

She added that AFMA and ASX are working with the industry to improve benchmarking practices. This includes by more clearly defining fallback language and cessation processes. Other participants suggested financial products could move from being priced at the BBSW to the Reserve Bank of Australia cash rate – and that Australia’s future as a multi-rate jurisdiction will continue to evolve.

Towards a net-zero future

The rise of climate-related investments, including an enhanced role for derivatives and hedging markets, was a second compelling conference theme. Scott O’Malia, Chief Executive Officer of ISDA, noted that corporations are developing strategies to achieve net-zero carbon emissions targets by 2030 or 2040. “It’s going to require mobilising capital markets and our members to make long-term investments,” he said.

Renewables account for 24 per cent of energy generation in Australia, making it one of the world’s most progressive and attractive trading locations. However, Australia’s local carbon market still has scope to scale further, with the value of global offsets projected to grow to US$1 trillion by 2050.

Bradley Campbell, General Manager of Equities and Commodities at ASX, observed that dramatic price fluctuations over the past year have “highlighted the underlying volatility in carbon markets”. As a result, better market tools are required to manage price risk.

ASX has been shortlisted by the Clean Energy Regulator to participate in the next phase of developing an Australian Carbon Exchange. Appropriate standards also need to be developed for the region’s fast-growing voluntary carbon markets. These involve market participants offsetting their emissions using abatement contracts that are not mandated by a central regulator.

ESG products set to soar

Finally, the conference recognised that companies and investors alike are increasingly focused on ESG. Brett Harper, Chief Executive Officer of AFMA, said a major focus for the association’s board – which includes bank CEOs and other financial leaders – is recommending appropriate regulatory frameworks to stimulate the growth of new products.

One example is sustainability-linked derivatives. These can be part of long-term financing vehicles that offer borrowers lower costs if they meet certain environmental objectives – for example, a reduction in carbon emissions.

Participants also noted the importance of continued industry collaboration to develop new environmental taxonomies – a classification system of environmentally sustainable economic activities – as well as improved data collection and integrity assurance of carbon credit schemes. 

“This is a fascinating time – where the one certainty is financial markets are going to look completely different to how they did a year ago,” Harper said. “I can’t think of another era when there has been so much change.”