[ 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
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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 // TheTradeNews.com // 47