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Regulation and collateral costs have made the cleared derivatives
market much more attractive for the buy-side. Joe Parsons asks
what else will it take for them to voluntarily take part?
T
he seismic shift in the
derivatives market post-fi-
nancial crisis has seen not
only a change in the way the prod-
ucts are traded and cleared, but
also in the nature of relationships
throughout the process.
The clearing of interest rate
swaps was not completely alien to
the buy-side prior to the financial
crisis, however asset managers
and pension funds were never
directly attached to the clear-
ing process of derivatives. With
less clearing activity pre-2008, a
middle-man between the clearing
house and the executor made
sense.
So imagine their surprise when
asset managers were told that
not only would they be clearing
inflation swaps, single-name
credit default swaps and repo, but
they could actually become direct
clearing members of central coun-
terparties (CCPs) such as LCH,
Eurex and DTCC.
Throughout 2016 and 2017, a
number of clearing houses have
established direct clearing routes
to enable more buy-side volumes
to flow through. Last year LCH
onboarded the UK’s Insight
Investment as the first sponsored
clearing member of RepoClear,
Eurex signed up signed Dutch
pension fund PGGM as its first
buy-side member for its securi-
ties lending clearing house, and
in April Northern Trust helped
facilitate the first directly cleared
cash and repo trade on behalf of
the Healthcare of Ontario Pension
Plan (HOOPP) with Canada’s
main derivatives clearing house.
Hedge funds were also one of
the early movers into voluntary
clearing, largely due to the margin
efficiencies offered to them as
opposed to trading in the bilateral
market.
Regulation has become one the
main incentives for the buy-side
to take up voluntary clearing of
their derivatives. Dodd Frank and
EMIR have made clearing for the
most widely traded swaps manda-
tory, while the uncleared margin
rules have made it too costly for
the buy-side to stay in the bilater-
ally traded world.
“Currently there exists a price
spread between cleared and
uncleared derivatives,” says Rob
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