Investors Shift to Cleared Derivatives03.09.2022
The impact of trends such as Uncleared Margin Rules (UMR) and the retirement of LIBOR are increasingly evident in global markets as investors replace uncleared derivatives with cleared swaps, futures and options.
The continued phase-in of UMR and the buy side’s desire to reduce counterparty risk have kept the use of uncleared derivatives on a path of continual decline. Over the past 12 months, for instance, 35% of the buy-side firms participating in a new Coalition Greenwich study conducted with the Futures Industry Association (FIA) reduced their use of uncleared interest-rate swaps. Furthermore, 43% of respondents expect liquidity in uncleared swaps across all asset classes to decrease.
— Coalition Greenwich (a division of CRISIL) (@CoalitionGrnwch) March 8, 2022
“That uncleared volume will not disappear but migrate to cleared swaps, futures and options,” says Stephen Bruel, Senior Analyst for Coalition Greenwich Market Structure & Technology and author of Derivatives Market Structure 2022: Identifying Opportunities for Growth.
Coalition Greenwich data shows that buy side use of cleared interest-rate swaps (IRS) and cleared inflation swaps increased by 52% and 58%, respectively, over the past year. The credit market showed similar trends with decreases in uncleared single-name, index credit-default swaps (CDS) and rises in cleared single-name and index CDS.
The buy side made impressive progress on LIBOR transition in the 18 months leading up to the end-of-year 2021 deadline. In prior Coalition Greenwich research, only about one in five buy-side firms said they felt prepared for the shift. That share jumped to 69% in Q4 2022.
“It is notable that, even at this late date, roughly three in 10 buy-side firms are uncertain about their level of preparedness for Libor transition,” says Stephen Bruel.
Although Bitcoin futures have become an important priority for the sell side, the buy side is not yet ready to commit. Approximately 43% of sell side firms are currently active in the Bitcoin futures market. By comparison, only 6% of derivatives investors are actively trading these products today. Fully half of buy-side firms say they have no interest in the emerging asset class.
Derivatives Market Structure 2022: Crypto, Carbon, China, and Beyond provides a unique perspective into the key drivers for the derivatives clearing business and reveals industry sentiment on several external factors impacting the health of the clearing industry. The report also identifies the internal steps that clearing firms are taking to gain competitive advantage, enhance their services and tap into new opportunities for growth.
Source: Coalition Greenwich
FTX’s proposal would replace futures commission merchants with an automated and centralized process.
The regulator voted to approve a proposed rulemaking to modify the interest rate swap clearing requirement.
Ownership gives Cboe entry to digital asset spot and derivatives, clearing and settlement.
Cboe reported record quarterly results following a record year in 2021.
FTX US want to remove futures commission merchants from the clearing process.