Market Participants Braced for Swaps Clearing
With upcoming regulations in the U.S. and Europe set to route transactions from the massive over-the-counter markets to regulated trading platforms and to clearing houses, the biggest players are bolstering their clearing capabilities.
“Everyone is getting ready for their initial tier of clients to clear their trades in the fourth quarter,” said Cassandra Tok, vice-president and head of North America OTC clearing sales at bulge bracket bank Goldman Sachs during the Futures Industry Association conference in New York last week.
Market participants from all sectors have been preparing for the vast sweeping changes outlined in upcoming Dodd-Frank regulation. Even though many of the proposed rules have not yet been finalized, chief compliance officers have been busy making sure their firms are prepared for what’s to come.
“With impending regulation, it’s obvious that clearing will become more important,” said Rich Repetto, analyst at investment bank Sandler O’Neill. “It’s just a matter of when it will occur, but regulators are definitely pushing more over-the-counter trades to standardized clearing.”
While the markets wait for Dodd-Frank’s implementation, various clearing houses have seen a substantial increase in cleared swaps trades in the lead-up to its yet-to-be defined clearing deadline.
“We have cleared dealer trades for the past 12 years and, since Lehman Brothers collapsed, the notional value of swaps we’ve cleared has doubled,” Floyd Converse, executive vice-president and head of SwapClear sales at clearing house LCH.Clearnet said.
London-based LCH.Clearnet is making a push in the U.S. with its SwapClear service as well as through a potential acquisition of Nasdaq OMX’s International Derivatives Clearing Group (IDCG). IDCG is based in New York, and opened in January 2009 for the clearing of interest rate swap futures. It has since struggled to gain significant market share.
Post-trade services, including clearing, settlement and collateral management, have all been thrust into the spotlight as integral services in the capital markets following the global financial crisis of 2008. Clearing covers the calculation of participants’ net obligations or net rights prior to settlement. Settlement is a composite of processes to transfer assets and financial resources between buyers and sellers, thus setting off the rights and obligations that stem from clearing.
Demand for collateral management has also grown amid Dodd-Frank in the U.S. and the European Market Infrastructure Regulation, or Emir, and the impending Basel capital rules, which require the increased use of collateral in order to cover exposures and mitigate counterparty risk.
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.