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)