LONDON, Sept 7 (IFR) - Citigroup and Deutsche Bank have become the first dealers to execute over-the-counter derivatives trades through LCH’s SwapAgent, a new service for the uncleared swaps market.
The service aims to achieve capital and operational efficiencies for bank clients through simplified and standardised trade process for bilateral swaps. SwapAgent acts as an independent calculation agent, enabling customers to exchange bilateral margin and settlement payments without the need for a central counterparty.
The two dealers used the service to process Swiss franc-denominated interest rate swaps and euro-denominated inflation swaps.
“As the non-cleared market for interest rate derivatives becomes increasingly complex, we welcome innovative solutions like LCH SwapAgent that help simplify the bilateral margining process, while enabling market participants to comply with the uncleared margin rules,” said Stuart Bancroft, managing director, CVA trading at Citi.
Services include standardisation of credit support annexes, end-to-end trade life cycle management, independent valuation and risk calculation, dispute elimination and payment netting. Compression of legacy trades will be also be added in due course.
“Through LCH SwapAgent we can extend the efficiencies of centralised clearing to the non-cleared market,” said Nathan Ondyak, global head of LCH SwapAgent. “We look forward to expanding this offering to include products such as cross-currency swaps in due course.”
Cross-currency swaps will be added to the service in the fourth quarter. The instruments have proven costly to trade from a capital perspective given their uncleared nature.
The new service signals the London-based clearinghouse’s expansion beyond cleared products in the US$483trn OTC derivatives market. Clearinghouses have encountered difficulties in pushing more exotic instruments, such as cross-currency swaps and interest rate options, into the cleared environment as risks can be tricky to manage.
LCH dropped long-running plans to launch swaptions clearing in favour of the standardised platform for bilateral swaps. CME began clearing US dollar swaptions in 2016.
Citi and Deutsche are two of 14 dealers that have already confirmed their support for the service.
LCH also plans to supply risk calculation data to the AcadiaSoft Hub to further streamline the margining process for the banks already using the product to comply with the non-cleared margin rules. (Reporting by Helen Bartholomew)