January 6, 2017 / 1:23 PM / 7 months ago

CORRECTED-DERIVATIVES-SwapClear sets new clearing and compression records

4 Min Read

(Corrects notional amount eliminated by compression)

By Helen Bartholomew

LONDON, Jan 6 (IFR) - LCH reported a 25% increase in volume on its SwapClear platform during 2016, setting new records for cleared activity in over-the-counter interest rate swaps. At the same time, record compression activity combined with maturing trades led to an overall reduction in gross notional at the clearinghouse.

Over US$665trn notional was cleared through the year, representing 3.8m derivatives trades. The growth was driven by clients expanding their use of clearing in response to regulatory changes and new products coming on line, such as inflation swaps that were added to the mix in April.

Alongside record levels of cleared activity, the clearinghouse eliminated over US$384trn of swaps notional through its compression services, which were used by 97 members and a record 510 clients through the year.

Since December 2014, total gross notional of contracts outstanding at the clearinghouse has fallen by around a third, to US$257trn. That reflects an additional US$1.184 quadrillion of cleared contracts, offset by US$616trn in maturing trades and US$699trn that has been eliminated by compression.

SwapClear has compressed more than US$1 quadrillion of interest rate swaps notional through unilateral, multilateral and blended coupon methods, since launching the service in 2008. While US derivatives rules under Dodd-Frank have required the largest US dealers to clear their vanilla swaps since early 2013, similar rules in Europe finally took effect in June.

According to the Bank for International Settlements, over 60% of OTC derivatives notional reported by dealers was cleared through central counterparties as of June 2016, and three-quarters of all interest rate swaps.

Expansion of the compression services has helped bring onboard category II clients that are not yet subject to mandatory clearing. Buyside clearing activity hit records in 2016 with almost US$140trn notional cleared on the SwapClear platform on behalf of non-bank clients.

For example, AHL - a systematic trading firm with US$19bn of assets under management, confirmed last year that it had started to clear interest rate exposures on a voluntary basis, attracted by the ability to collapse those exposures and create leaner swaps books.

"Capital and balance sheet management continues to be a top priority for banks impacted by the Basel III capital requirements," said Cameron Goh, global head of product management for rates and FX derivatives at LCH. "Central clearing and the use of compression remains an extremely effective method of driving down notional outstanding and line items in a portfolio, with the goal of maximising capital and operational efficiency.

LCH, a subsidiary of the London Stock Exchange Group, is set to sell its French clearing arm, LCH SA, in an attempt to smooth the path for Deutsche Boerse's US$14bn acquisition of LSEG. Euronext has made a formal and irrevocable offer of 510m for the former Clearnet business that houses the credit derivatives clearing operation, CDSClear. The deal is subject to regulatory approvals and a successful closing of the DB/LSEG deal. (Reporting by Helen Bartholomew; Editing by Ian Edmondson)

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