Trading Rises With Clearing
The increase in clearing following the introduction of rules requiring the exchange of margin for uncleared derivatives six months ago has been accompanied by a rise in trading activity.
Chris Barnes at analytics and research firm Clarus Financial Technology said in a blog: “The transition to clearing certainly has the propensity to make our markets more efficient. The data tells us that so far, more clearing means more volumes.”
In September last year the first phase of the new regime for requiring the exchange of margin for non-cleared derivatives came into effect for the largest market participants. Barnes said that since the rules were introduced there have been significant increases in the proportion of trades being cleared across non deliverable forwards, overnight indexed swaps, Latin American currencies and inflation swaps. For example, clearing rates for inflation swaps has increased from 10% to 80% in the past six months and volumes have increased.
“Multi-lateral netting is a huge motivating factor for dealers to clear the bulk of their portfolios,” added Barnes.
Multi-lateral netting allows to use their balance sheet more efficiently and reduces the capital requirements for their derivatives portfolios.
Clarus said this month that open interest of foreign exchange non-deliverable forwards reached more than $500bn (€470bn) for the first time due to the shift to central clearing from a bilateral only market.
The London Stock Exchange Group said in its annual report for 2016 that notional cleared NDF volumes increased to US$3,191bn last year from $1,050bn in 2015 at LCH, the exchange’s clearing house.
“While the uncleared margin rules only applied from September 2016, we are seeing significantly increased participation and interest from all regions in the ForexClear NDF service,” added the LSE.
The clearing business will also be boosted by the launch of LCH SwapAgent which is due later this year. LCH SwapAgent aims to simplify the processing, margining and settlement of non-cleared derivatives.
Clearing services raised issues when the European Commission blocked the proposed merger between LSE Group and Deutsche Börse. Commissioner Vestager said in a statement that the merger raised three main issues which all related to clearing.
The competition regulator said the proposed merger would have created a monopoly in clearing fixed income instruments, especially government bonds and repurchase agreements, and in single stock equity derivatives. Between them the two exchanges own three of the largest European clearing houses – Eurex in Germany, LCH and CC&G in Italy which is also owned by LSE Group.
For single stock equity derivatives Eurex competes with Euronext and the merger would have removed this competition.
“The companies did offer to sell off LCH.Clearnet SA, a clearing house based in France and owned by the London Stock Exchange Group,” added Vestager. “That would have answered our concerns relating to single stock equity derivatives. But it would not have been an effective solution to the de facto monopoly in fixed-income clearing.”
Vestager continued that to overcome these problems London Stock Exchange could have sold MTS, a bond trading platform, which is a small business compared to the overall size of the two companies. “But in the end, the London Stock Exchange decided not to do that,” she said.
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.
CEDX opened on 6 September, offering contracts on Cboe Europe single country and pan-European indices.