Europe Opts for Voluntary Clearing

Terry Flanagan

Phil Whitehurst, head of Europe, Middle East and Africa product at SwapClear said large volumes of European clients are clearing interest rate swaps and related rate derivatives on a voluntary basis ahead of new regulations coming into force.

SwapClear is the over-the-counter interest rate derivatives clearing unit of LCH.Clearnet, the multi-asset clearer majority owned by the London Stock Exchange.

The incoming European Market Infrastructure Regulation requires central counterparty clearing of over-the-counter derivatives, similar to the Dodd Frank regulation in the US, although an implementation date has not yet been specified.

Whitehurst told Markets Media: “Large volumes of European clients are already clearing interest rate swaps and related rate derivatives on a voluntary basis ahead of a mandatory environment.”

This month Stockholm-based Nasdaq OMX Clearing became the first central counterparty in Europe to be authorised under EMIR. Whitehurst said LCH.Clearnet was working through the approval process. The clearer has submitted its rule book to its regulator, the Bank of England, before the application is reviewed by a college of European regulators and central banks.

In addition to mandatory clearing, EMIR strengthens protection of customer assets. “EMIR encourages CCPs and their members to enhance customer protection choice relative to the US by requiring records of the specific collateral allocated to specific customers,” Whitehurst added.

He declined to comment on authorization might be received.

SwapClear has already started mandatory clearing in the U.S. due to deadlines set by the Dodd-Frank financial reform act.

“In the US SwapClear had a major uplift in volumes ahead of the Dodd-Frank deadlines. At the start of 2013, buyside volumes rose from around $50bn a day to $200 billion and are now in the region of $250 billion,” added Whitehurst. ”In Europe we expect some further growth in the notional amounts cleared but a stronger increase in the number of tickets as smaller clients join SwapClear.”

Whitehurst said SwapClear’s main priority this year is Europe, and supporting clients to meet their forthcoming obligation to clear OTC derivatives, but clients are also begin to voluntarily clear in Asia. For example, SwapClear has a strong focus on Australia where the regulator allowed local banks to join SwapClear as clearing members last year.

“Major initiatives for the year also include introducing inflation swaps and developing our compression services, which will support more efficient use of capital,” added Whitehurst.

This month LCH.Clearnet said it had introduced multilateral compression, in addition to SwapClear’s existing solo and duo capabilities, which allows multiple members to simultaneously compress their trades with each other.

Compression reduces the number of trades and notional outstanding by terminating contracts with offsetting positions so clients can reduce their counterparty credit exposure and capital costs, while increasing operational efficiency. Last year SwapClear compressed more than $83 trillion through its proprietary and TriOptima’s compression offering.

This year SwapClear aims to enhance its compression offering to include netting of trades with different maturities but the same future cash flows and netting of swaps where the terms are identical expect for the coupon payments.

Zar Amrolia, co-head of fixed income and currencies at Deutsche Bank, said in a statement: “Trade compression is an important tool which provides operational efficiencies and allows us to reduce our counterparty credit exposure, which in turn frees up capital than can be deployed elsewhere.”

Analysts at KBW, the financial services boutique, said in a note last week that in the first quarter of 2014 LCH’s average daily volume is tracking up 75% year-on-year to $393 billion while rival CME’s average daily volume has increased 22% over the same period to $117 billion.

KBW said: “CME management noted that LCH clears a much higher proportion of overnight index swaps, which can skew comparisons. Swapclear also clears significantly higher volume of dealer-to-dealer trades, which we exclude from this comparison. CME’s interest rate swaps open interest was at $12.3 trillion last week – higher than LCH’s client IRS open interest of $10.9 trillion.”

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