LONDON, April 6 (IFR) - Record volume of interest rate swaps
were cleared through central counterparties in March, as new
rules forcing derivatives users to exchange daily margin on
their uncleared swaps exposures raised the cost and operational
burden associated with bilateral trades.
LCH's SwapClear platform cleared US$105trn notional of
interest rate swaps in March, a 70% increase on March 2016 and
38% up on February volume. The record month took first-quarter
cleared volume on the platform to US$244trn, including US$56trn
from buyside clients.
“The recent introduction of the uncleared margin rules has
acted as a significant incentive for firms to direct more trades
to clearing, while the upcoming clearing mandate for rates has
encouraged buyside clients to clear more of their portfolios,"
said Cameron Goh, global head of product management for rates
and FX derivatives at LCH.
Under the European Market Infrastructure Regulation,
financial counterparties and alternative investment funds with
over €8bn notional swaps exposures were mandated to clear their
vanilla swaps exposures from December 2016. Category Three
clients, which include financial counterparties and AIFs with
swaps exposure below the €8bn threshold, will be required to
clear all standardised swaps from June 2017.
Swaps counterparties were also hit with uncleared margin
rules on March 1, which mandate a daily exchange of collateral
on exposures that are not cleared through CCPs. Global
regulators provided a six-month grace period for compliance but
uncertainty around the scope of relief triggered a preference
for cleared instruments among many buyside firms.
Margin rules were behind a widespread migration of inflation
swaps and non-deliverable forward FX trades into the cleared
world. LCH's ForexClear posted a nine-fold year-on-year jump for
March volumes as cleared notional hit US$929bn. Inflation swaps
clearing also hit a record US$397bn for the month.
While many buyside firms are clearing their swaps ahead of
the mandate, some exempt entities are being enticed by the
netting and compression benefits, and as cleared swap prices
become the default price.
Germany's KfW has confirmed that it will begin clearing its
euro-denominated interest rate swaps through Deutsche Boerse's
Eurex Clearing platform. The development agency follows in the
footsteps of Germany's sovereign debt agency, Finanzagentur,
which began clearing OTC interest rate swaps through EurexOTC
Clear in late 2016.
As a government-backed entity, KfW is exempt from the EMIR
clearing mandate but is eyeing settlement efficiency benefits
for the swap transactions used to hedge part of its €75bn annual
bond issuance programme against interest rate changes.
"KfW’s funding is based on a broad diversification of
business partners. Therefore it makes sense to use central
clearing to expand the number of our derivatives partners, while
at the same time taking advantage of the benefits of central
clearing from a risk management perspective," said Guenther
Braeunig, KfW board member responsible for capital markets.
Since the beginning of 2017, swaps clearing volumes on
EurexOTC Clear have increased by 30%, taking notional
outstanding to more than €1.2trn. That still lags SwapClear's
US$282trn notional outstanding, but the Frankfurt clearinghouse
hopes that the addition of large issuer clients will attract
additional business by smoothing the structural supply and
demand imbalances that have opened up a basis between the same
swaps at different clearinghouses.
In addition to regulatory drivers, March is typically a high
volume month for cleared swaps due to quarterly IMM roll
activity and semi-annual credit default swap rolls.
Overall interest rate swap volumes have increased alongside
rising US interest rates and expected tapering of quantitative
easing activities by the European Central Bank. Data from
Swapsinfo.org, collated from the DTCC and BSDR repositories,
show that more than US$840bn of interest rate swaps notional
traded during the first week in March - the most active week
since the DTCC began collecting data in 2013.
Listed markets show similar trends, with first quarter
trading in fixed income derivatives on the Eurex exchange
jumping by 27% year-on-year. The exchange recorded strong
appetite for French government bond futures ahead of the
presidential elections as 10.9m euro-OAT futures changed hands
during the first quarter - a 58% year-on-year increase.
(Reporting by Helen Bartholomew)