Interest Rate Swaps Traverse OTC and Exchanges
Pelagus Capital Fund and Newedge, a multi-asset brokerage and clearing firm, have announced that the fund has cleared OTC interest rate swaps (IRS) at LCH.Clearnet’s SwapClear using Newedge’s SwapClear Clearing Membership, which operates alongside its Futures Commissions Merchant membership.
Pelagus, an income relative value fund, already cleared OTC trades on LCH SwapClear to comply with OTC clearing requirements and benefit from reduced counterparty risk, an efficient and industrial collateral management service, and potential capital and margin efficiencies.
“We were early adopters of OTC clearing and are pleased to have now worked with Newedge on this business – in particular, being able to test the Business As Usual portability of cleared trades for the first time,” said Peter Jayawardena, chief operating officer of Mako Investment Managers, investment manager to Pelagus.
Noted John Wilson, global head of OTC clearing at Newedge: “We are delighted to have supported Pelagus’ ongoing OTC clearing activities, and to work with them on proving the portability of trades. Our expansion to more CCPs in the coming months gives funds like Pelagus confidence to manage a changing and challenging marketplace.”
Global Markets Exchange Group Limited (GMEX) will launch an interest rate swap futures contract on its London Derivatives Exchange (LDX) segment.
GMEX’s new product, called a Constant Maturity Future (“CMF”), has been designed to address the complications for hedging interest rates that have been associated with the standard quarterly (March, June, Sept, Dec) expiring futures contracts.
The industry continues to adapt to meet the G20-led market reforms to reduce systemic risk by pushing some privately negotiated derivatives onto electronic trading venues and through central counterparty (“CCP”) clearing houses.
“We are focused on alternative asset classes as a consequence of MifiD II, Emir, and Dodd-Frank, and the consequent need to move to equivalent on-exchange products, with a big focus on IRS and the futurization of swaps,” said Hirander Misra, president and managing director of GMEX. “GMEX is offering an alternative to OTC products with closely aligned exchange products.”
GMEX was created to target market opportunities brought about by changes to international regulation in developed markets and by growth and development in emerging market economies.
As a key market targeted to move to CCP based futures contracts, the IRS market has been the target of multiple attempts to launch futures contracts by the futures community. The GMEX approach is very different to IRS futures products so far launched, as it provides a much more accurate track of the real exposure to the changes in the curve than existing contracts.
“GMEX Group offers a highly relevant response on how an exchange model should be adapted in the wake of recent financial reform and increasing regulatory requirements globally,” said Misra.
Newedge’s OTC Clearing services, part of a multi-asset class offering designed for investment firms of all sizes, are supported by a partnership between Societe Generale Corporate & Investment Banking (SG CIB) and Crédit Agricole Corporate and Investment Bank (CACIB).
“We have enhanced our clearing services significantly over the past six months, strengthening our offer from listed derivatives and OTC commodity swaps, to IRS OTC swaps to include both CME and LCH SwapClear,” said Nicolas Breteau, CEO at Newedge. “Augmenting our cross border and clearing solutions positions us well to continue to meet client needs and tap into future growth opportunities.”
Phase 5 of the uncleared margin rules (UMR) took effect from September 2021.
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.