LONDON, Nov 30 (IFR) - Credit Suisse and Deutsche Bank have completed the first cross-currency basis swap on LCH’s SwapAgent platform for uncleared derivatives trades.
Through SwapAgent, LCH aims to bring efficiency savings to bilateral instruments by providing many of the processes that have become standard for cleared swaps. Cross-currency swaps have become particularly costly from a capital perspective as they are not cleared and are now subject to initial and variation margin requirements that apply to OTC derivatives held on a bilateral basis.
The euro-US dollar cross-currency basis swap was also the first non-cleared trade to be transacted in LCH’s settlement-to-market framework. LCH STM enables variation margin to be treated as settlement rather than collateralisation, allowing for netting of settlement and improved capital treatment of the instruments.
“We are continuously looking for new ways to optimise our trading portfolios and balance sheet,” said Joseph Macdonald, head of collateral optimisation trading at Deutsche Bank. He said the service helps the bank achieve those goals through the improved capital treatment and compression opportunities.
LCH developed SwapAgent as an alternative to pushing illiquid or unsuitable products into clearing. The clearinghouse dropped long-running plans to launch swaptions clearing in favour of the standardised bilateral swaps platform, which offers credit support annex standardisation, end-to-end life-cycle management, independent valuation and risk calculation, dispute elimination payment netting and compression.
“Our vision for LCH SwapAgent is to extend the trusted infrastructure and efficiencies of clearing to the non-cleared derivatives market,” said Nathan Ondyak, global head of LCH SwapAgent. “Through SwapAgent, participants in the cross-currency basis market can reduce unnecessary risk and payments, increase trade compression and simplify the post-trade process.”
Swiss franc-denominated interest rate swaps and euro-denominated inflation swaps became the first trades to be executed on the platform in September.
The platform now processes cross-currency basis swaps denominated in six currencies against the dollar; sterling, yen, euros, Swiss francs, Canadian dollars and Australian dollars.
The latest transaction was brokered by ICAP and processed through MarkitServ.
“We see the move toward standardisation as a way to improve liquidity in the cross-currency basis market, and see this as a positive step forward for the industry,” said Simon Payne, head of cross-currency basis at ICAP.
Credit Suisse and Deutsche bank are two of 14 dealers that have already confirmed their support for the service. (Reporting by Helen Bartholomew)