The TRADE 56 - Page 45

[ M A R K E T R E V I E W | D E R I V AT I V E S C L E A R I N G ] 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 Issue 56 // // 45