NEW YORK, June 14 (IFR) - The second phase of the Dodd-Frank clearing mandate launched this week without any major hitches, something of a surprise amid market-wide concerns that buyside firms would not be ready in time.
Cleared OTC swap volumes increased substantially each day through the middle of the week and market participants reported no major operational issues, something of a coup for a market that had been faced with a major overhaul and whose participants had voiced concerns regarding readiness over the past three months.
According to data from the DTCC’s interest rate swap repository, cleared volumes increased through the week with 600 trades on Monday, rising to 1,302 on Wednesday.
“Clients that were required to clear this week have found they are able to continue trading in the same volumes and through the same strategies as they were before and successfully clear those products without issue,” said Raymond Kahn, head of the OTC clearing business at Barclays.
Futures Commission Merchants and clearinghouse heads reported a major ramp-up in the weeks leading up to June 10, which helped to smooth the transition. LCH.Clearnet on-boarded over 300 new clients in the month of May, according to Daniel Maguire, head of the firm’s Swapclear business in the US.
“The reality is all those household names and clients were pretty well set from our perspective, there was a bit of a crush at the last minute, but everyone was set up who needed to be set up over the weekend,” said Maguire. “The market environment may have helped as well since rates have been slow moving [until recently] so people have been able to gradually move into clearing.”
CME cleared an average of US$52bn notional of interest rate swaps through Wednesday. LCH had US$262bn and US$340bn on Monday and Tuesday respectively.
The attention now turns to capital efficiencies across the different clearinghouses and brokers. Among the criteria for selection includes liquidity margin requirements, and product choice.
“Now we get into the stage where we’ll see a fair amount of capital planning,” said Chris Edmonds, CEO of ICE Clear Credit. “In the past some buyside firms could maintain relationships with their prime broker that made it easier to collateralise positions on the run, but now that they have to put collateral up in a moment’s notice they’ll have to figure out where and how to efficiently deploy that capital.”
Notional at ICE in index-based credit default swaps rose steadily from US$20bn cleared on Monday to US$32bn on Tuesday and US$42bn on Wednesday. ICE also offers single-name CDS clearing, but the product is not a part of the current cleared mandate and thus volumes have remained muted.
ICE remains the dominant player in OTC CDS clearing, but is also launching a CDS index future this Monday in an effort to attract credit traders who want to avoid onerous Dodd-Frank margin requirements.
The CDS index future is a hybrid product aimed at allowing credit traders to take views on CDS indices while still receiving the margin treatment of a futures product. The main competition will be TrueEx, who in cooperation with Standard & Poor’s will be launching a competing CDS future product this Autumn.
With several hundred buyside participants now caught in the mandatory clearing net, and more joining in September, clearing houses are scrambling for their cut of the new business, with LCH and CME leading the race.
CME has been the preferred choice of some major US buyside entities, according to market participants, many of which are keen to take advantage of the clearinghouse’s ability to portfolio margin OTC interest rate swaps against Treasury futures. So far only Barclays is able to offer the service as part of its clearing suite, however.
Jack Callahan, group executive director of OTC products at CME, told IFR a handful of banks and buysiders are planning to go live with the portfolio margining service in June and July.
“Firms had been focused on the mandate and now they have had to work on a transfer process since the offsetting positions are held in different accounts,” he said.
That should help volumes if true, but the firm is still facing an uphill struggle in gleaning the all-important dealer-to-dealer flow maintained by LCH, essentially a wealth of liquidity that allows for ease in putting on offsetting positions that reduce margin requirements.
Dealer-to-dealer flow at CME increased from 2% of the clearer’s overall notional in May to over 10% in June. Callahan added the firm will be looking to add more currencies; it currently clears interest rates in 10 currencies. LCH has a distinct competitive advantage, clearing in 27 currencies with more in the pipeline.
LCH is still fighting through some issues related to real-time clearing. In mid-May, the firm came into compliance with the Commodity Futures Trading Commission’s requirement to provide confirmation of trade acceptance at the clearinghouse within 60 seconds of being submitted through their Real-Time Trading Registration programme.
But the programme requires clearing firms to have collateral for each trade on hand at the time of submission, whereas CME and ICE allow for a one day lag. That issue is causing problems for brokers and their clients, say brokers, but so far has not caused volumes to migrate.
Both are developing clearing capabilities for swaptions; CME is still defining the exact underlyings but plans to launch before the end of the year, while LCH is looking to launch inflation swaps and swaptions in 2014. (This story will be published in the June 15 issue of International Financing Review, a Thomson Reuters publication; www.ifre.com)
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