SwapClear Could Process $1,000tr Notional This Year

Shanny Basar

SwapClear, the interest rate clearing business of London Stock Exchange Group, could process a record $1,000 trillion in notional this year and has continued to add clients from the European Union despite concerns over the UK leaving the trading bloc.

The European Union has proposed that systematically important clearing houses that clear euro derivatives have to be located in the EU after Brexit. In addition Eurex Clearing, the clearing house owned by Deutsche Börse, launched a partnership program last year to build a liquid alternative for processing euro denominated interest rate derivatives in the remaining EU27.

Cameron Goh, SwapClear

Cameron Goh, LCH

Cameron Goh, global head of product, rates at LCH, told Markets Media: “We have not seen any change in clients’ behaviour in euro swap clearing.”

SwapClear, a unit of the London Stock Exchange Group’s clearer LCH, had a 34% increase in the the number of clients clearing euro swaps in the first half of this year according to the London Stock Exchange’s results for the period.

“We have continued to onboard clients from the EU over the last six months,” added Goh. “When volatility increases, we’ve seen clients accessing the largest pool of global swaps liquidity and our market share has remained strong.”

Eurex said in its latest monthly briefing that the 30th firm joined its partnership program in July.

Analysts at Berenberg, the German private bank, have estimated in a report that Deutsche Börse clears about 2.2% of OTC interest rate swaps, compared to 0.8% at the start of this year.

“The market share gains made by Deutsche Börse year-to-date are impressive in magnitude, but narrow in scope,” added Berenberg. “Our analysis suggests that 97% of all OTC products cleared at Deutsche Börse are denominated in euros, and two-thirds of these are shorter-term products (forward rate agreements, or FRAs) rather than full-duration interest rate swaps.”

SwapClear’s euro volumes contributed to a record total of $576 trillion notional cleared in the first half of this year, 23% up from a year ago. During the whole of 2017, SwapClear processed $873 trillion in notional.

Goh said: “Based on the last six months, there is a good chance that we could clear close to $1,000 trillion by the end of the year. We will continue to innovate and ensure that our customers benefit from choice and a global liquidity pool.”

Global liquidity

LCH expanded its global liquidity pool this year by being approved as a central counterparty by Banco de Mexico, allowing the clearing of derivatives from Mexican-domiciled market participants.

“Our Mexican recognition was significant, as it increased competition in the country and allowed local entities to become direct members of the SwapClear service,” added Goh.

The global liquidity pool also grew when  LCH launched clearing of non-deliverable interest rate swaps in May. NDFs are derivatives that are used to hedge or speculate against currencies where exchange controls make it difficult for overseas investors to make a physical cash settlement. Market participants are able to clear swaps denominated in Chinese yuan, Korean won and Indian rupees.

Charles Feng, head, FX, rates & credit trading, Greater China at Standard Chartered, said in a statement: “Being able to clear our non-deliverable swaps book at LCH enables us to effectively manage counterparty risk, while offsetting our margin obligations with other correlated products we clear at SwapClear.”

Goh continued that SwapClear will add further Asian and Latin American currencies to non-deliverable interest rate swaps over the next six to nine months, subject to regulatory approval.

“Latin America and Asia provide good growth opportunities, so long as they meet our stringent risk management parameters,” he added.

Moving away from Libor

The US also presents a growth opportunity as the derivatives market will also undergo structural changes over the next two years due to the transition from Libor. The Secured Overnight Financing Rate (SOFR) will be the new reference rate for the largest derivatives market in the world.

SOFR was first published by the Federal Reserve Bank of New York in April this year. Last month LCH was the first clearing house to process US dollar interest rate swap benchmarked to SOFR with  Credit Suisse, Goldman Sachs and J.P.Morgan among the first participants to clear SOFR swaps.

“As a result of our partnership and collaboration with market participants, LCH was the first CCP to launch clearing of the new swaps referencing SOFR,” added Goh. “Clearing allows our customers to gradually transition while the market for trading securities referencing SOFR develops. To date we have seen eight participants trade and clear swaps referencing SOFR at LCH.”

Market participants clearing SOFR swaps can achieve margin benefits by offsetting their positions against Libor derivatives using the same rates default fund at LCH.

Thomas Pluta, co-head of global rates at J.P. Morgan, said in a statement: “The transition to using SOFR is hugely significant both for the US and the global derivatives markets, as clearing SOFR swaps will be a key component in developing a liquid market for this product.”

Other countries have also introduced new reference rates in order to transition from Libor. Saron, the Swiss average overnight rate came into force at the end of 2017, and LCH had started clearing Saron swaps last October. In April this year LCH began clearing Sonia futures which are based on the new UK reference rate – the sterling overnight index average.

CurveGlobal, the London Stock Exchange Group’s derivatives venture, and ICE, the US exchange, have both launched Sonia futures. ICE will also be introducing SOFR futures.

Foreign exchange

In foreign exchange, LCH last month launched the clearing of deliverable FX options in collaboration with CLS, the bank-owned settlement infrastructure.

Andrew Batchelor, managing director, global FX business manager at Barclays, said in a statement: “The strong benefit of clearing deliverable FX options has been apparent since the introduction of the uncleared margin rules in 2016.”

As regulators introduced the mandatory exchange of margin for non-cleared derivatives LCH launched SwapAgent in 2016 to process trades in the over-the-counter bilateral rates and foreign exchange markets. SwapAgent went live in November last year processing cross-currency swaps.

In June this year LSE Group announced that it acquired a 16% stake in AcadiaSoft, which automates margin payments for counterparties engaged in collateral management around the globe. Alongside the investment, LCH SwapAgent and AcadiaSoft agreed to collaborate to simplify the operational process for margin calculation.


Outside clearing, Goh also sees further growth opportunities in compression, a process in which clients can “tear-up” offsetting trades in their portfolios to reduce the notional outstanding and the number of line items in their portfolio while maintaining the same risk exposure. Use of compression services has increased following the introduction of stricter capital requirements, such as the Basel III leverage ratio, which has led to banks reducing their balance sheets and capital efficiency becoming increasingly important.

SwapClear compressed a record $388 trillion in the first half of this year according to the LSEG’s results:

“Last year we introduced more multilateral cycles and we are now encouraging increased use of risk-constrained compression which expands the number of trades that can be included in a compression cycle,” added Goh.

Risk-constrained compression cycles give more freedom on which swaps can be offset, for example, they do not need to have interest rate payments which exactly match. LCH has also expanded compression service providers from TriOptima, the post-trade infrastructure provider for OTC derivatives.

“In addition to TriOptima, new approved compression service providers Quantile Technologies and Capitalab have both run their first risk-constrained LCH cleared compression cycles since the launch of the programme in the fourth quarter of 2017,” added Goh. “Customers can decide which compression cycle to run which encourages choice and innovation.”

Goh continued that in the next 12 months LCH will introduce multilateral compression for non-deliverable swaps and inflation swaps, subject to regulatory approval.

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