Buyside Boosts LCH Volumes
Uncleared margin rules are driving derivatives into central clearing.
Record volumes from asset managers contributed to all-time high cleared notional volumes of interest rate swaps last year at LCH, the London Stock Exchange Group’s clearing unit.
LCH’s SwapClear service processed over $665 trillion in notional in 2016, a 25% year-on-year increase, including the buyside clearing a record $139 trillion in notional.
New rules for the mandatory exchange of initial margins for non-cleared bilateral derivatives began to be phased in last September for the largest swap dealers in the United States, Japan and Canada and will be implemented in Europe this year. From March this year, new global rules for the payment of variation margin for non-cleared OTC derivatives will come into effect and immediately apply to a wide variety of counterparties including dealers, buyside firms, pension funds and corporates.
Daniel Maguire, global head of rates and FX derivatives at LCH said in a statement last September: “The uncleared margin rules that are coming into force across the world have been a catalyst for driving eligible and appropriate derivatives trades towards central clearing.”
In 2015 Citadel Securities (Europe) Limited became the first non-bank clearing member of SwapClear. Cameron Goh , global head of product management, rates and FX derivatives at LCH told Markets Media that LCH is thinking about appropriate methods for some buyside firms to become clearing members without having to contribute to the clearinghouse’s default fund.
Goh continued that factors that boosted SwapClear volumes last year included political events driving volatility, the introduction of mandatory clearing for certain products in the European Union and new margin rules that came into force last September.
He said: “After the introduction of the uncleared margin rules last September inflation swap volumes went through the roof. The buyside use these for hedging and they are long-dated so the margin rules led to the market shifting into clearing so they use less capital.”
In November LCH said that SwapClear had processed a total of $1 trillion in notional of inflation swaps since the service launched in April 2015, with a significant increase in cleared activity following the implementation of non-cleared margin rules.
Goh added that the introduction of the uncleared margin rules last September led to a tenfold increase in cleared non-deliverable foreign exchange forwards via LCH’s ForexClear.
“Cleared NDF volumes rose from $3bn a day to between $30bn and $35bn,” he said. “We are still seeing strong daily volumes and 2017 will be even larger.”
As at 23 September 2016 ForexClear said over $1 trillion in notional had been cleared in the year-to-date with over $220bn in notional cleared that month.
SwapClear also compressed a record $384 trillion in notional in 2016. Compression allows clearing members and their clients to “tear up” offsetting trades to reduce the notional outstanding and number of items in their portfolios while maintaining the same risk profile. LCH offers both proprietary compression services and services in conjunction with TriOptima, the post-trade infrastructure provider for over-the-counter derivatives.
Last September inflation swaps became available for solo compression within their own portfolios at SwapClear products.
Goh said: “We will continue to make compression more flexible and increase eligible trades, for example, by including blended rate inflation swaps in the second half of this year.”
LCH is also preparing for this year’s new variation margin rules. Last November LCH said it was launching LCH SwapAgent this year for processing trades in the OTC bilateral rates and foreign exchange markets. When using SwapAgent, LCH will not become the clearing counterparty but will act as an independent calculation agent, facilitating the calculation and exchange of bilateral margin. Clients will be able to use the service for standardized document terms, trade processing, margining and payment processing. Clients can send trade details for their uncleared trades alongside data for the trades that will be cleared.
Eleven dealers confirmed their support for LCH SwapAgent last November and Goh said another three will also be using the new service.
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