LONDON, Jan 8 (IFR) - London-based LCH cleared a record US$873trn of over-the-counter derivatives notional in 2017, as the introduction of new products and the rising cost of bilateral exposures overcame uncertainty around the clearinghouse’s future as the UK negotiates its departure from the European Union.
A 31% year-on-year increase in cleared notional came as derivatives users became subject to new rules requiring them to post collateral against their uncleared derivatives exposures. That has driven many swaps counterparties to voluntarily clear trades that are not subject to a clearing mandate.
For example, inflation swaps clearing hit US$3.1trn on the SwapClear platform – almost three times 2016 levels.
“We’ve seen significant growth in volumes across multiple asset classes driven by new customers as well as additional flow from existing customers,” LCH CEO Daniel Maguire said in a statement.
LCH’s ForexClear processed more than US$11trn notional in FX derivatives, including non-deliverable forwards – a three-fold increase over 2016 levels. EquityClear processed more than 1bn trades, while CDSClear processed €1.1trn notional across credit default swap indices and single name CDS.
The surge of activity came at a time of unprecedented uncertainty for the London-based clearinghouse, which is fighting to maintain its European dominance as the UK plans to leave the EU in 2019. New EU proposals could force the most systemically significant firms handling euro-denominated swaps to locate within the 27-member bloc - a move that could prise activity from LCH and fragment euro swaps into onshore/offshore markets.
LCH currently handles more than 90% of cleared euro swaps. Frankfurt-based rival, Eurex, has stepped up the competition with a new profit-sharing programme at its clearinghouse in a bid to lure activity.
Alongside new clearing records, LCH eliminated US$608trn of swaps notional through its compression services – a 58% year-on-year increase. Derivatives dealers and their clients have torn up more than US$1 quadrillion of superfluous derivatives trades to-date, slimming down hefty swaps notionals in response to Basel III capital and leverage pressures.
Repo clearing also hit records. A 25% jump took volume to €175trn for the year across the UK and Paris arms of RepoClear. That came alongside the introduction of new markets, including Belgian and German government debt. A new sponsored access model introduced at the UK platform allowed buyside firms to clear repo trades with a bank sponsor providing default fund contributions and facilitating margin payments. That service will be expanded to Paris-based LCH SA later this year.
The clearinghouse made its first foray into non-cleared derivatives during 2017. LCH SwapAgent went live for cross-currency basis swaps, which are currently transacted only on a bilateral basis, enabling many of the efficiency benefits that were only available for cleared swaps. The service, which has attracted support from 14 banks, will be extended to swaptions later this year.
“In 2018, we look forward to continuing to partner with our customers, as we look to add additional products and services to our existing wide range spanning the cleared and increasingly the non-cleared market,” said Maguire.
Other products slated for development in 2018 include portfolio margining service, LCH Spider. The service allows OTC swaps to be netted against listed rates futures cleared through the CCP, including those traded on London Stock Exchange Group’s CurveGlobal derivatives exchange. That service is already running for short-term rates and will be expanded to long-term instruments.
“The group is committed to its open access approach, working in partnership with our customers to promote greater choice and innovation, reducing risk and maximising capital and operational efficiencies,” said Maguire.
Other planned developments include the introduction of clearing services for non-deliverable interest rate swaps in Chinese yuan, Korean Won and Indian rupees. RepoClear will extend clearing to more EU debt markets, while FX options will be added to ForexClear. (Reporting by Helen Bartholomew)