The TRADE 56 - Page 47

[ M A R K E T “The general view is that clients do not necessarily want to allocate the required bandwidth to handle the re- quirements 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 con- cerns around current market capacity. The counterparties most active in pushing have R E V I E W | D E R I V AT I V E S C L E A R I N G ] “The most client interest for non-mandated products are in instruments where there is a cost and liquidity difference at the point of execution.” NICK RUSTAD, GLOBAL HEAD OF CLEARING, JP MORGAN noticed an improvement in pricing for longer-dat- ed repo trades,” he says. “This set-up is good for the larger players that have the infrastructure in place. They are having the balance sheet and liquidity benefits, and for the smaller players that can’t manage multiple repo accounts, it gives them a better liquidity profile.” However, the extent to which all of the buy-side are taking part in voluntary clearing has been limited, says Nick Rustad, global head of clearing at JP Morgan, in which the majority of activity in NDF and inflation clearing has been the in- ter-dealer community. “The banking and inter-dealer community has been active in non-mandated voluntary cleared trades, however you have yet to see demand from the client clearing side reach that level.” “For OTC derivatives, demand is still in those mandated categories i.e. G4 interest rate swaps, some emerging markets currency swaps and index CDS. The most client interest for non-man- dated products are in instruments where there is a cost and liquidity difference at the point of exe- cution. If that changes or you get to a point where banks only want to quote on a cleared basis, you may see a shift to voluntary clearing,” says Rustad. Certainly, a lot of buy-siders have taken a wait- and-see approach, each one interested in moving to clearing but wary of being the first mover. Furthermore, smaller-sized asset managers and hedge funds may not have the infrastructure in place to clear their trades or even the tools to quantify the impacts of the collateral require- ments on their portfolio and the cost differences Issue 56 // // 47