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voluntary clearing of their derivatives. Dodd Frank and EMIR have made clearing for the most widely traded swaps mandatory, while the uncleared margin rules have made it too costly for the buy-side to stay in the bilaterally traded world.“ Currently there exists a price spread between cleared and uncleared derivatives,” says Rob Scott, head of custody and clearing, Commerzbank.“ The commercial cost of operating in a non-cleared, bilateral environment is becoming increasingly apparent in terms of price and margin requirement. This is leading to increases and an incentive to voluntary clearing activities.”“ The US NDF market has set a precedent by voluntary clearing through LCH ForexClear, and we will see the move in Europe to perform more voluntary clearing.” LCH has posted a number of record-breaking achievements in cleared volumes, largely due to massive uptick in voluntary clearing of certain products from the buy-side. SwapClear, LCH’ s interest rate derivatives clearing service processed over $ 873 trillion in notional volumes during 2017, with member and client flow increasing 31 % year-on-year. It also saw over $ 3.1 trillion of inflation swaps cleared, meanwhile compression volumes rose 58 % from 2016 to over $ 608 trillion.“ We’ ve seen significant growth in volumes across multiple asset classes driven by new customers as well as
“ We also see new entrants, with broker-dealer clients who are facilitating trades between a pool of banks and hedge funds.”
additional flow from existing customers,” said Daniel Maguire, chief executive of LCH Group in January. LCH’ s RepoClear service cleared $ 175 trillion over the course of the year, a 25 % increase on 2016, while EquityClear processed over one billion trades and ForexClear processed more than $ 11 trillion in notional. The CDSClear service recorded $ 1.1 trillion in notional processed across its CDS index and single-names offering.“ The size of credit lines given for cleared trades rather than for bilateral is more favourable due to the credit profile of facing a clearing house, and they [ hedge funds ] are seeing better pricing in some cases,” says Jamie Gavin, head of OTC clearing EMEA and APAC, Societe Generale Prime Services.“ We also see new entrants, with broker-dealer clients who are facilitating trades between a pool of banks and hedge funds. That model previously didn’ t work in the bilateral world due to capital reasons, but with clearing and the added benefits you get that is increasing.” Now that mandatory clearing is entrenched in the OTC markets, more and more market participants are moving to a cleared market not because they are required to, but because that is where the liquidity is. Regulations such as EMIR and the uncleared margin rules have made it pricier to do business bilaterally, and instead have shifted focus to the
JAMIE GAVIN, HEAD OF OTC CLEARING EMEA AND APAC, SOCIETE GENERALE PRIME SERVICES benefits clearing offers.“ There has been a mentality shift in clearing derivatives,” says Kieron Smith, deputy head of prime services and financing at BNP Paribas.“ Previously it was about clearing when it is mandated to do so, now it is to do with liquidity and feasibility to do so. The uncleared margin rules have caused a focus on the operational and simplicity benefits of clearing products.”“ The general view is that clients do not necessarily want to allocate the required bandwidth to handle the requirements of the uncleared margin rules. Clearing may be more expensive on face value, but in the long term it is cheaper.” This is most evident in the FX market, in which 40-50 % of the FX non-deliverable forward( NDF) interdealer market has moved to clearing over the past year. Societe Generale’ s Gavin believes the next big asset class to move to clearing is FX options and repo.“ We expect FX options will follow the same trend. The big one coming next is around repo, and the we are seeing demand from clients wanting to become sponsored clearing members,” adds Gavin. For pension funds that are currently exempt from EMIR, repo clearing is becoming increasingly attractive to them, as with the case with PGGM joining Eurex as a clearing member and Insight Investment with LCH’ s RepoClear. According to Nick Gant, head of sales trading and EMEA head of fixed income prime brokerage at Societe Generale, pension funds and money market funds, as opposed to hedge funds, have been the early adopters of this model.“ Some buy-side like the cleared model due to concerns around current market capacity. The counterparties most active in pushing have noticed an improvement in pricing for longer-dated repo trades,” he says.“ This set-up is good for the larger players that have the infrastructure
24 Global Custodian Summer 2018