Uncleared Derivative Volumes Hold Steady
The notional outstanding of uncleared interest rate derivatives was $105 (€94) trillion at the end last year, similar to 2016, according to derivatives analytics provider Clarus Financial Technology.
Chris Barnes said on the Clarus blog: “This has been remarkably stable since 2016, in a range of $98 – $114 trillion. Some readers may be thinking how is this possible? If we have clearing mandates across the major jurisdictions, who is still trading uncleared derivatives?”
— Clarus (@clarusft) May 22, 2019
He explained that much of the current notional outstanding reflects new activity, especially swaptions, with monthly volumes of more than $1 trillion each month just in the US, none of which is cleared. In addition, some significant market participants are exempt from regulatory clearing mandates.
“The net balance is to see a relatively stable stock of uncleared interest rate derivatives,” Barnes added. “Compression is not as effective in uncleared space due to credit support annex -specificity, and with the nature of participants more likely to be directional, it looks like this stock of trades is there to stay.”
Barnes was surprised that uncleared foreign exchange derivatives volume of $88 trillion at the end of last year was less than uncleared interest rate derivatives
“Without any clearing mandates in foreign exchange, and non-deliverable forwards only a small portion of the overall FX market, most of the open interest in FX markets is uncleared,” he wrote.
However, Clarus highlighted a sustained reduction in notional outstanding of uncleared credit derivatives from $7.9 trillion to $3.9 trillion in the last three years. Barnes said this probably due to the concentration of trading in index products, which are nearly all cleared in the US due to regulatory mandates.
The Bank for International Settlement this month released its over-the-counter derivatives statistics for the end of last year.
The share of outstanding OTC #Derivatives cleared through central counterparties (CCPs) remained near 75% for interest rate contracts and 55% for credit default swap contracts #BISStatistics https://t.co/b43ey6aTLF pic.twitter.com/i8rGlsaFb5
— Bank for International Settlements (@BIS_org) May 2, 2019
“Central clearing had been making steady inroads in the OTC derivatives market for many years,” added BIS. “In the last few years, the upward trend has levelled off.”
The study said the share of notional amounts of interest rate derivatives with CCPs has been stable at almost 75% since the end of June 2015. In contrast only 3% of OTC foreign exchange contracts were with a CCP, while the share for equity-linked contracts was negligible.
BIS continued that the rise of central clearing has been an important structural change in OTC derivatives markets over the past decade, together with an increase in trade compression, the elimination of economically redundant derivatives positions, both of which primarily affected interest rate contracts and drive down their market values.
“New practices such as settle-to-market – where banks, instead of posting collateral against the change in market value (ie variation margin), make outright payments to restore the market value to zero – have additionally contributed to the observed decline in their market values,” added BIS.
However BIS noted that market values for foreign exchange contracts have been less affected by these developments, as only the non-deliverable forwards segment is cleared.
“These patterns help illuminate the decline in market values relative to notional amounts for interest rate contracts, and the relative increase in the gross market value share of foreign exchange contracts,” said BIS.
CCP best practices
CCP12, the global association of central counterparties, today published a best practices position paper to contribute to ongoing discussions around clearing houses’ operations and risk management.
Kausick Saha, chief risk officer at the Clearing Corporation of India and clearing and co-chair of the risk working committee of CCP12, said in a statement: “With this position paper, CCP12 would like to emphasize the important role of CCPs in the financial market and to communicate with the broader industry the current CCP best practices.”
The position paper says policy makers must continue to support the use of global CCP clearing services due to the systemic risk benefits inherent to central clearing, and should everything in their power to avoid taking steps that could undermine the benefits that market users received from central clearing organizations.
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.