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voluntary clearing of their derivatives . Dodd Frank and EMIR have made clearing for the most widely traded swaps mandatory , while the uncleared margin rules have made it too costly for the buy-side to stay in the bilaterally traded world . “ Currently there exists a price spread between cleared and uncleared derivatives ,” says Rob Scott , head of custody and clearing , Commerzbank . “ The commercial cost of operating in a non-cleared , bilateral environment is becoming increasingly apparent in terms of price and margin requirement . This is leading to increases and an incentive to voluntary clearing activities .” “ The US NDF market has set a precedent by voluntary clearing through LCH ForexClear , and we will see the move in Europe to perform more voluntary clearing .” LCH has posted a number of record-breaking achievements in cleared volumes , largely due to massive uptick in voluntary clearing of certain products from the buy-side . SwapClear , LCH ’ s interest rate derivatives clearing service processed over $ 873 trillion in notional volumes during 2017 , with member and client flow increasing 31 % year-on-year . It also saw over $ 3.1 trillion of inflation swaps cleared , meanwhile compression volumes rose 58 % from 2016 to over $ 608 trillion . “ We ’ ve seen significant growth in volumes across multiple asset classes driven by new customers as well as
“ We also see new entrants , with broker-dealer clients who are facilitating trades between a pool of banks and hedge funds .”
additional flow from existing customers ,” said Daniel Maguire , chief executive of LCH Group in January . LCH ’ s RepoClear service cleared $ 175 trillion over the course of the year , a 25 % increase on 2016 , while EquityClear processed over one billion trades and ForexClear processed more than $ 11 trillion in notional . The CDSClear service recorded $ 1.1 trillion in notional processed across its CDS index and single-names offering . “ The size of credit lines given for cleared trades rather than for bilateral is more favourable due to the credit profile of facing a clearing house , and they [ hedge funds ] are seeing better pricing in some cases ,” says Jamie Gavin , head of OTC clearing EMEA and APAC , Societe Generale Prime Services . “ We also see new entrants , with broker-dealer clients who are facilitating trades between a pool of banks and hedge funds . That model previously didn ’ t work in the bilateral world due to capital reasons , but with clearing and the added benefits you get that is increasing .” Now that mandatory clearing is entrenched in the OTC markets , more and more market participants are moving to a cleared market not because they are required to , but because that is where the liquidity is . Regulations such as EMIR and the uncleared margin rules have made it pricier to do business bilaterally , and instead have shifted focus to the
JAMIE GAVIN , HEAD OF OTC CLEARING EMEA AND APAC , SOCIETE GENERALE PRIME SERVICES benefits clearing offers . “ There has been a mentality shift in clearing derivatives ,” says Kieron Smith , deputy head of prime services and financing at BNP Paribas . “ Previously it was about clearing when it is mandated to do so , now it is to do with liquidity and feasibility to do so . The uncleared margin rules have caused a focus on the operational and simplicity benefits of clearing products .” “ The general view is that clients do not necessarily want to allocate the required bandwidth to handle the requirements of the uncleared margin rules . Clearing may be more expensive on face value , but in the long term it is cheaper .” This is most evident in the FX market , in which 40-50 % of the FX non-deliverable forward ( NDF ) interdealer market has moved to clearing over the past year . Societe Generale ’ s Gavin believes the next big asset class to move to clearing is FX options and repo . “ We expect FX options will follow the same trend . The big one coming next is around repo , and the we are seeing demand from clients wanting to become sponsored clearing members ,” adds Gavin . For pension funds that are currently exempt from EMIR , repo clearing is becoming increasingly attractive to them , as with the case with PGGM joining Eurex as a clearing member and Insight Investment with LCH ’ s RepoClear . According to Nick Gant , head of sales trading and EMEA head of fixed income prime brokerage at Societe Generale , pension funds and money market funds , as opposed to hedge funds , have been the early adopters of this model . “ Some buy-side like the cleared model due to concerns around current market capacity . The counterparties most active in pushing have noticed an improvement in pricing for longer-dated repo trades ,” he says . “ This set-up is good for the larger players that have the infrastructure
24 Global Custodian Summer 2018