LCH REPORTS RECORD VOLUMES AS EMIR TAKES HOLD
Clearing houses are experiencing record activity as banks and investors comply with the European Market Infrastructure Regulation and push their over-the-counter fixed income and foreign exchange swaps towards centralised venues that bolster risk management for the industry.
According to LCH, the world’s largest swaps clearer, March as well as the first three months of the year saw the processing of notional principal amounts of interest rates, inflation and non-deliverable forex forwards at record levels.
LCH processed $244tn of gross notional outstanding – a broad measure of all outstanding derivative positions globally – in interest rate swaps in the three months to March 31, a rise of 4% on the same period in 2016 and was boosted by investors like asset managers and institutional investors clearing swaps.
Over $100tn of that total was cleared in March alone, a year-on-year rise of 72% it added. It also cleared a notional $2.4tn in foreign exchange, from more than 330,000 trades.
The clearinghouse also noted that growth occurred in all markets, with new record nominal sizes in each. Nominal volumes rose 21.2% in the French sector. Belgian (38.6%), Dutch (53.2%), Italian (up 183%) and German (41.2%) as well as the UK gilts market (28%).
“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, product management, rates and FX derivatives, LCH.
“The execution, risk management and operational efficiencies of clearing have resulted in significant take-up of clearing among participants that are not subjected to a clearing mandate,” he added.”We expect demand to continue as we roll out further products and services over the course of the year.”
Smaller rivals, such as Germany’s Eurex Clearing, have also recorded strong growth over the same period reflecting the reshaping of this vast market by post-financial crisis reforms. It boasted a 30% hike in the volume it processes, culminating in a notional outstanding of Ä1.2tn.
The boost in activity underlines the industry’s expectation that a March 1 milestone in derivatives regulation would fundamentally alter the behaviour of hundreds of asset managers, corporations, credit institutions and pension funds who use the OTC market to hedge their liabilities.
At the beginning of March global rules required investors to post more margin or collateral to backstop private swap deals. Historically the industry has supplied minimal margin, meaning there were less protected funds to cover losses if one of the parties defaulted.
The new regulations were expected to raise overall costs for the market, which had been blamed by policymakers for exacerbating the financial crisis. Authorities backed down from a hard-line introduction as hundreds of asset managers were unprepared and instead demanded “good faith” efforts to comply.
Separately, there are concerns over the future of London as the leading light in euro denominated clearing. Manfred Weber, the leader of the centre-right European People’s Party – the largest political group in the European parliament, to which both the German chancellor and the commission president belong – has said that euro-denominated clearing could no longer be undertaken in the City when the UK leaves the EU.
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