Citadel pushes for expansion of mandatory clearing in Europe 

Shanny Basar

Citadel, the US hedge fund, said it supports mandatory clearing of over-the-counter interest rate derivatives in Europe in a wider range of currencies.

The European Securities and Markets Authority launched a consultation on clearing under Emir for certain European currencies outside the G4 (US dollars, euros, sterling and Japanese yen) for which comments were due by 15 July. Esma published responses on its website.

Citadel said it believes central clearing of OTC derivatives will mitigate systemic risk, increase transparency, promote competition, and  improve the safety, stability and integrity of the global financial markets.

“The buy-side has cleared $236.6 trillion notional in interest rate OTC derivatives at LCH, where buy-side open interest now stands at $14.9 trillion and on average over 3,000 buy-side trades are cleared per day,” added Citadel. “Over $70.6 trillion notional in interest rate OTC derivatives has been cleared at CME, with open interest standing at over $24.0 trillion and over 2,000 trades being cleared per day.  We understand that most of this volume is driven by the buy-side.”

The US hedge fund said it voluntarily clears interest rate OTC derivatives in non-G4 currencies. “We believe it is appropriate at this time to expand the clearing obligation globally to OTC derivatives denominated in AUD, CAD, CHF, DKK, NOK, NZD, and SEK,” added Citadel.

Isda, the OTC derivatives association, FIA Europe and the Investment Association, who both represent investors, said in a joint response that they support central clearing but that additional currencies should not be subject to a mandatory clearing obligation. The response said: “We consider that there is insufficient liquidity in the EEA [European Economic Area] Rates classes, and as such a clearing member default in one of the EEA currencies could significantly impact liquidity and financial stability.”

The three trade bodies argued that EEA currencies only represented 1.5% of the total global volume in interest rate swaps in 2013 and are not systemic, while the lack of parallel futures and bond markets make hedging more difficult.

The Managed Funds Association supported Citadel’s position of widening the currencies that should fall  under mandatory clearing in  Europe.

The CFTC in the US has not proposed mandatory clearing of swaps in Scandinavian currencies so the MFA asked Esma to co-ordinate with  the US regulator to ensure there is a harmonised approach for these products.

The MFA supported mandatory clearing for IRS denominated in currencies that are traded in high volumes globally such as Australian dollars, Swiss francs, and Canadian dollars, rather than those traded in specific member states of the EU or by individual institutions.

From the sellside, Deutsche Bank said in its comments that it strongly supports the move towards central clearing but wanted international consistency to avoid possible competitive and liquidity distortions.

“It is an oversimplification to argue that because liquidity for the IRS classes being considered for mandatory clearing (CZK, DKK, HUF, NOK, SEK and PLN – i.e. EEA currencies) is mostly concentrated in Europe, international coordination is less important,” added Deutsche Bank. “Further, it is not clear that a mandatory clearing obligation would be appropriate in view of reduced liquidity in IRS denominated in EEA currencies compared to IRS denominated in G4 currencies (i.e. USD, GPB, EUR and JPY).”

The bank argued that the scheduled start of margining requirements in September 2016 for non-cleared OTC derivatives should also help mitigate possible systemic risk concerns.

Deutsche Bank said: “There should only be a mandatory clearing obligation for IRS denominated in EEA currencies where there is an equivalent obligation in other major jurisdictions.”

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