Australia's biggest banks have made inroads towards meeting their obligations to centrally clear over-the-counter derivatives and these are expected to be introduced into Australia later this year. Eight Australian domestic and international banks have joined the Australian Securities Exchange's OTC Interest Rate Derivatives Clearing Service as clearing participants and have started clearing trades on the platform. This is despite the fact that central clearing of OTC derivatives is not yet mandatory in Australia.The ASX OTC Derivatives Clearing Service was launched to pre-empt domestic regulatory efforts to bring Australia into line with its G20 commitments on central counterparty clearing. It also reflects the fact that these larger institutions have obligations in foreign jurisdictions when they deal in derivatives denominated in their currencies. As such, they are already subject to the central clearing requirements of those jurisdictions. The dealer-to-dealer solution, within the ASX's OTC Derivatives Clearing Service, became available on July 1, 2013. European clearing house LCH.Clearnet also offers an OTC derivatives clearing service for Australian financial institutions.The eight banks include ANZ, Commonwealth Bank, Citi, Deutsche Bank, JP Morgan, National Australia Bank, UBS and Westpac. Collectively, this group accounts for approximately a 80 to 90 per cent market share of the A$15 trillion per annum Australian dollar OTC derivatives market.Peter Hiom, deputy chief executive of the ASX, said the exchange was now focusing on building liquidity, broadening the product offering and extending the service to end-clients. It is planning to have this service ready by April 2014.While domestic banks have the option of clearing their OTC derivatives trades using an overseas facility, the ASX said there were advantages in having a domestic solution. The exchange said all of the collateral held against trades would be kept onshore and subject to Australian laws and regulations.Australia is taking a mandatory approach to the clearing of over-the-counter derivatives as part of the global regulatory framework for these instruments that is expected to take shape this year. As announced in July last year, the Australian reforms will not affect Australian dollar-denominated products. At this stage, the Council of Financial Regulators' proposals would only require a central clearing facility for interest rate derivatives denominated in US dollars, euros, sterling or yen.Australian dollar-denominated OTC derivatives have escaped capture at this stage because of the limited access to domestic central clearing counterparties. This position may change in the coming years, however, as regulators plan to review the availability of direct clearing for domestic market participants later in 2014.The CFR has advocated an "incentives-led transition to central clearing" and will monitor Australian banks' progress throughout 2014.This is an edited version of an article first published by the Compliance Complete Service of Thomson Reuters Accelus.