Central Clearing Makes Inroads

Shanny Basar

Central clearing is still gaining ground in the over-the-counter derivatives market according to the latest survey from the Bank for International Settlements.

This week BIS published its latest OTC derivatives statistics which refer to the end of December 2017.

In the OTC interest rate derivatives markets, reporting dealers’ positions booked against central counterparties was $320 (€268) trillion at the end of last year, about three quarters of notional amounts outstanding. “The share of cleared positions was highest for OTC interest rate derivatives denominated in Canadian dollars, at 88%, and lowest for those in euros, at 72%,” added BIS.

This week LCH, the London Stock Exchange’s clearing house, began clearing non-deliverable interest rate swaps in Chinese yuan, Korean won and Indian rupee. These swaps are used to hedge or speculate against currencies where exchange controls make it difficult for overseas investors to make a physical cash settlement.

This is the first time that the SwapClear unit has offered clearing of derivatives denominated in these currencies and expands its range of currencies to 21. LCH said in a statement: “The product has been launched in response to increased customer demand, particularly among clearing members and clients based in the Asia-Pacific region, with 17 dealers having completed default management testing in preparation for clearing.”

CME Group also noted its success in clearing swaps in emerging market currencies this week. The US derivatives exchange said it has added 13 participants to swaps clearing in Korean won and Indian rupee:

CME launched swap clearing in these two currencies in July  last year  with $65bn in notional cleared to date, including $43bn this year.

For OTC foreign exchange derivatives, BIS noted that only 2% of notional amounts were centrally cleared at the end of last year. “While the BIS does not collect a decomposition of FX derivatives into FX swaps and forwards, the cleared amounts were probably concentrated in non-deliverable forwards because they are one of the few FX instruments that CCPs offer for clearing,” added the report.

However the introduction of uncleared margin rules have boosted clearing of NDFs as shown by the London Stock Exchange Group’s ForexClear unit reporting a record first quarter this year for both trades processed and notional cleared.

The final phase of the initial margin rules came into force in September last year requiring all financial counterparties to post collateral for initial margin against over-the-counter derivatives contracts that are not cleared. In addition, the need to post collateral for variation margin for uncleared derivatives also came into force after a six-month grace period given by regulators to allow the necessary contracts to be put in place across the industry.

Chris Barnes, at derivatives analytics provider Clarus Financial Technology, said in a blog analysing NDF clearing in the first two months of this year that LCH ForexClear has a 97% market share and that a minimum of 17% of the market is now cleared:

NDF Clearing February 2018

Barnes wrote: “Cleared NDF volumes have grown by 60%+ year-on-year and up to 30% of volumes are now cleared.”

BIS added that the gross market value of outstanding OTC derivatives contracts fell to $11 trillion at the end of last year, the lowest level since 2007. The gross amount of outstanding OTC interest rate derivatives, the dominant product,  also fell to the the lowest level since 2007 to $7.6 trillion.

“The amount denominated in all major currencies declined during this period,” added the BIS. “The decline is likely to have reflected increases in long-term yields, which reduced the gap between market interest rates on the reporting date and those prevailing at contract inception.”

The report noted that the market value of US dollar contracts has dropped markedly.

At the end of 2011, the gross market value of euro- and US dollar-denominated contracts were both $8.4 trillion.  However by the end of last year euro-denominated derivatives had fallen to $3.6 trillion, and their US dollar equivalents to $1.4 trillion.

“At end-2017, the market value of US dollar contracts was not far above that of sterling contracts ($1.3 trillion),” added the BIS.

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