The expanding Asian presence of LCH is reflected in the job title of its most senior person on the ground – Marcus Robinson. Previously he was head of Swapclear Australia, now he is Asia-Pacific head of rates and FX derivatives, and this is no US-style title inflation. Over the 12-month period covered by this award LCH became the first international clearing house to be granted a licence in Japan – though currently this doesn't include yen products – and also received approval from both Singapore and Hong Kong regulators. With its existing onshore presence in Australia, 2016 saw LCH's business become truly pan-Asian.
"Given the global nature of the over-the-counter derivatives market with a number of banks operating across a wide variety of countries, it's good that we can also offer our service across different locations. Japan, Australia, Hong Kong and Singapore remain the key interest rate swaps trading hubs in Asia and we have focused on ensuring we can give members and participants access to SwapClear and its global liquidity pool in those locations, whether or not a clearing mandate is in place at local level."
As is fitting for a global clearing house LCH's Asia expansion wasn't just in one direction: in October Bank of China became the first Chinese outfit to become a protected payments systems bank with it. This leaves Bank of China's London branch as one of a dozen or so firms to provide post-trade cash margining services for LCH. Robinson declines to speculate on the Bank of China's motivation and points out that LCH members are free to use whichever accredited bank they want to meet their cash margin requirements. But given that typically Chinese banks' offshore activities are intended to serve other Chinese clients, this presages a potential expansion of global swaps activities by dealers headquartered in the Middle Kingdom.
LCH also expanded its eligible collateral offerings to include Austraclear, the ASX's central securities depository, which means Australian members can now post securities in Sydney. This development will be welcomed by Australian buy-side participants who strongly value the capability to clear and post collateral in their own timezone and under the local legal system.
Robinson points to the launch of Australian dollar overnight index swap (OIS) clearing as the most significant product development in the Asia-Pacific business over the last 12 months. He says OIS clearing was demanded by the market and since its launch in January this year, feedback from dealers is that overall liquidity in this instrument has increased since it became clearable in Australia.
The appetite for cleared, over non-cleared instruments in Australia is demonstrated by the sharp pick-up in Aussie dollar single period swaps, which are clearable, versus forward rate agreement which are not.
"Last year the amount of single period swaps we cleared was small, maybe as low as 5% of the total market volumes. LCH is now clearing close to 17% of the total flows – and that's been driven by the market wanting to get the benefits of clearing."
Getting the Aussie dollar OIS clearing service off the ground wasn't without difficulty due to the existing convention that this instrument was fixed and settled on the same day – an approach which is not possible for clearing given that this operates under a global calendar.
"We worked closely with the local market and industry bodies to amend that convention from one day to two days. We had to have these conversations across the board because Aussie OIS is traded globally and we needed to change with banks in London as well as those in Australia. This doesn't impact the risk profile of the trade as it's merely a settlement issue, and also brings it into line with how other OIS products are settled, such as yen for example," Robinson says.
As of May, LCH has cleared over A$9.5 trillion ($7.2 trillion) in Aussie OIS; A$3.7 trillion of these volumes coming in May alone. In Aussie IRS the UK firm has a 91% market share and has seen volumes increase in all Asia currency IRS in 2016, with Aussie dollar up 305%, Hong Kong dollar 68%, yen 71% and New Zealand dollar 34%.
"What has been interesting is that a major portion of these volumes come from market players that aren't currently captured by clearing mandates. LCH has seen a significant increase in activity from these participants and also interest from others that are getting prepared to clear at some point in the future."
The week on Risk.net, July 14–20, 2017Receive this by email