As buy-side firms use artificial intelligence and other digital tools to remake trading infrastructure, the drive to automate operations is causing many firms to take a second look at clearing more of their derivatives trades, which can create new workflow efficiencies.

Regulators have been pushing derivatives trading away from bilateral transactions and toward central clearing since at least 2008, when credit default swaps played a leading role in the global financial crisis. Since then, clearing has permeated the most-liquid corners of the swaps market, such as vanilla interest-rate and credit indices, and is now taking root in the long tail of more complex instrument types.

Tight mandates on clearing have moved upwards of 80% of interest-rate derivatives trades to central clearing, yet clearing had not gained as much ground in security-based credit derivatives. As of the end of Q1 2024, however, almost 50% of this instrument was cleared.

An Increasingly Important Incentive to Clear Trades

Some of that rapid clearing uptake can be explained by continued regulatory pressure. Provisions in Basel III endgame and the final two phases of the Uncleared Margin Rules (UMR) encourage clearing via punitive capital and margin regimes for uncleared swaps. However, new data from Coalition Greenwich shows that buy-side market participants increasingly see clearing as a tool to enhance operational efficiency.

“Most buy-side firms have a decade of experience with clearing swaps,” says Stephen Bruel, Senior Analyst in the Market Structure & Technology group at Coalition Greenwich and author of The Buy Side’s Views on Derivatives Clearing. “And while clearing derivatives isn’t an operational panacea, it can improve workflow efficiency in many cases. That’s a critical factor at a time when investors are working to upgrade platforms and rein in costs.”

More than 80% of the buy-side market participants in a recent Coalition Greenwich study cite increased operational efficiency as an important reason to use clearing.

“Buy-side firms now see efficiencies associated with clearing as important, making it a key driver to clear—even over factors like reducing counterparty risk and lowering margin costs,” Stephen Bruel says.

The Buy Side’s Views on Derivatives Clearing traces the growth of clearing in global derivatives markets, examines the key reasons buy-side firms are using clearing and analyzes the top factors driving firms’ selection of clearing brokers.

Source: Coalition Greenwich