SwapClear Reports Swap Compression 

Terry Flanagan

SwapClear, part of London Stock Exchange’s LCH.Clearnet, achieved an annual reduction in notional outstanding for the first time in 2014. Demand for swap compression is expected to further increase this year.

Last year SwapClear reduced notional outstanding from $426 trillion to $362 trillion according to an email to Markets Media. When swaps are compressed participating dealers are able to eliminate trades when their risks can be offset amongst each another according to the parameters set by each individual firm.

Compression allows banks to set aside less capital against their swap portfolios and reduces operational risk as there are fewer individual trades that need to be monitored and settled.

Analysts at Barclays Capital said in a report that 2015 will be an opportunity for Swapclear to further extend its compression services as banks are under significant pressure to reduce leverage ratios and comply with more stringent capital requirements. The report said portfolio compression consists of two steps: the first is to gather market participants who want to tear up trades and manage the acceptance process until the proposal is legally binding, and the second is to ensure that sufficient margin is in place at the clearer and update books and records to reflect the first step.

“Currently SwapClear manages step two in the process and service providers, in particular ICAP’s TriReduce service, account for step one,” said Barclays. “However, an opportunity may lie in SwapClear potentially expanding to providing the service in step one as well or certainly offering compression of a greater number of asset classes and currencies.”

On 12 January SwapClear increased the the number of trades available for compression by broadening the range of currencies.

Last year Swapclear moved TriOptima multilateral compression cycles from monthly to weekly. In 2015 SwapClear intends to increase the capacity of trades that can be compressed, increase the frequency of the Solo with Blended Rate compression cycle and extend multilateral compression, via TriOptima’s TriReduce, for non-members.

SwapClear operates a multilateral compression service with TriOptima but also has proprietary compression services such as solo compression which enables a party to tear up its’ eligible trades, regardless of counterparty. Blended rate compression allows swaps to be torn up if they have the same payments dates regardless of the interest rate.

The blended rate service was launched last September and compression cycles take place twice a week.

Daniel Maguire, global head of SwapClear, said at a media briefing at the end of last year that the blended rate compression cycle would become daily. “In the New Year as demand increases we would look to increase the current cap of compressing 40,000 trades per blended cycle and 7,000 per member. In 2015 we will also add FRA to the blended rate cycle,” said Maguire.

The Barclays analysts said the introduction of mandatory central clearing in Europe for some over-the-counter derivatives from the second half of this year will provide a further growth opportunity for LCH.Clearnet.

So far SwapClear’s revenue growth has come from increasing members, rather than from clients moving OTC transactions into clearing. The analysts said the number of SwapClear members was 113 in November last year, nearly double the 64 clients in June 2012.

“Growth in number of members is still the main driver of SwapClear revenues at the moment,” added Barclays. “However, client average daily volume should ramp-up significantly with mandatory central clearing. BIS data suggests that OTC derivatives notional outstanding is 11 times that of on-exchange derivatives.”

Client clearing grew sharply after mandatory central clearing of interest rate swaps came into force in the US in 2013 where SwapClear has a market share of approximately 80% according to Barclays.

Featured image via Maksym Yemelyanov/ Dollar Photo Club

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