London-based clearer LCH.Clearnet has extended its SwapClear platform to give buy-side market participants access to central clearing for interest rate swaps.
SwapClear is already widely used by banks to clear interest rate swaps across 14 major currencies, but the service has never before been available to dealers' clients.
"It's a big evolutionary step forward for the market," says Harry Harrison, New York-based global head of rates trading at Barclays Capital.
The extension will offer buy-side firms access to "a unique and proven default-management process, reduced counterparty risk, portability, margin segregation and improved operational efficiencies," says the firm's London-based chief executive, Roger Liddell.
Submitting client trades for clearing with SwapClear will involve clients and dealers affirming trades with Markit Wire, the London-based data vendor's trade-processing platform. The bilateral trade will then be ‘given up' by both sides to a clearing member of SwapClear chosen by the client. The clearing member will then submit the trade for central clearing. All subsequent trade events, including novations and partial novations, will be handled by the SwapClear clearing member, says LCH.Clearnet.
Pressure to extend central clearing for over-the-counter derivatives products has been building over the past year in response to the financial crisis, and particularly since the collapse of Lehman Brothers in September 2008.
It’s a big evolutionary step forward for the market
A clearing member of LCH.Clearnet, Lehman defaulted on trades with a total notional value of $9 trillion. Within three weeks, the default was fully resolved within the level of margin held by the clearer and at no loss to dealers. "If you look at what happened with Lehman, the close-out process with SwapClear and the way money changed hands went very smoothly," says Harrison.
A June survey by the Bank for International Settlements found buy-side firms account for $208 trillion in notional in OTC interest rate swaps. LCH.Clearnet believes $146 trillion of this could be eligible for clearing with SwapClear. It says the service has already cleared interest rate swaps with a notional value of $206 trillion, comprising 60% of interdealer volumes as of December 2008.
Sixteen major dealers will offer the service, including Banca IMI, BarCap, BNP Paribas, Bank of America Merrill Lynch, Calyon, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan, Morgan Stanley, Nomura, Royal Bank of Scotland, Société Générale and UBS.
LCH.Clearnet first announced plans to set up the system in May.