Inflation Swap Clearing Moves Forward
Tradeweb executed the first cleared request-for-quote inflation swap as the introduction of rules requiring the exchange of margin for uncleared derivatives has boosted central clearing.
In September last year the first phase of the new regime requiring the exchange of margin for non-cleared derivatives came into effect for the largest market participants. Six months later Clarus Financial Technology, the derivatives analytics provider, said clearing rates for inflation swaps had increased from 10% to 80%, decreasing the requirement to exchange margin on bilateral over-the-counter derivatives.
Clarus said in a blog: “Multi-lateral netting is a huge motivating factor for dealers to clear the bulk of their portfolios.” Multi-lateral netting allows to use their balance sheet more efficiently and reduces the capital requirements for their derivatives portfolios.
Tradeweb Markets, the provider of fixed income, derivatives and exchange-traded fund marketplaces, said in a statement that the first cleared inflation swap transaction using in-competition RFQ protocol was executed on its European interest rate swap platform. The trade was executed by Legal & General Investment Management and cleared by LCH, the clearing house owned by the London Stock Exchange Group.
Inflation swap execution has traditionally been conducted by phone or chat but Tradeweb aggregates inflation swaps liquidity on one screen, enabling traders to request prices from multiple dealers simultaneously and also for trades to be executed using straight-through-processing.
Philip Hunter, head of rate trading at LGIM, said in a statement: “This trade is a significant milestone for the inflation swaps market. The STP benefits of electronic execution coupled with the improved price discovery achieved via the RFQ model satisfy the industry’s increasing need to streamline trading desk procedures, while simultaneously enabling buyside firms to demonstrate best execution.”
MiFID II, the regulations covering financial markets in European Union from January, introduces new pre- and post-trade transparency requirements and stricter best execution requirements.
In response to the uncleared margin rules, LCH launched SwapAgent to process trades in the OTC bilateral rates and foreign exchange markets. When using SwapAgent, LCH does not become the clearing counterparty but instead, acts as an independent calculation agent, facilitating the calculation and exchange of bilateral margin. Clients can also use the service for standardized document terms, trade processing, margining and payment processing.
This month LCH SwapAgent said it had processed its first trades. Citi and Deutsche Bank were counterparties to the Swiss Franc-denominated interest rate swap and Euro-denominated inflation swap which were processed through MarkitSERV. The service is due to expand to include cross-currency swaps in the fourth quarter of this year.
Stuart Bancroft, managing director, CVA trading at Citi, said in a statement: “As the non-cleared market for interest rate derivatives becomes increasingly complex, we welcome innovative solutions like LCH SwapAgent that help simplify the bilateral margining process, while enabling market participants to comply with the uncleared margin rules.”
Citi is amongst the group of 14 dealers who have confirmed their support for LCH SwapAgent.
LCH also plans to supply risk calculation data to the AcadiaSoft Hub to further streamline the margining process for the banks already using The Hub to comply with the non-cleared margin rules.
An industry group including global banks and The Depository Trust & Clearing Corporation joined forces with software provider AcadiaSoft to develop a hub to meet the regulatory requirements and allow straight-through processing of margin calculations and payments on a standardized basis across the industry. AcadiaSoft’s users calculate their own trade level risk factors for submission to the Hub for reconciliation between the two counterparties and completion of the initial margin calculation.
Temporary equivalence is set to expire on June 30 2022.
IRS trading volumes have fragmented without an equivalence agreement.
Phase 5 of the uncleared margin rules came into effect on 1 September.
Triparty repos can be executed across U.S. Treasury securities to central clearing.
CEDX opened on 6 September, offering contracts on Cboe Europe single country and pan-European indices.