# Swaps data: cleared vs non-cleared margin

## Growing margin burden for non-cleared swaps means cleared margin is likely to grow further, argues Amir Khwaja

Initial margin numbers are growing for the over-the-counter derivatives market – a result of rules that require some products to be centrally cleared, as well as separate requirements compelling a growing band of firms to collect margin for non-cleared trades.

But the two regulatory edifices function in different ways and also interact, it is likely that, as the non-cleared rules steadily expand, they will encourage more firms to clear voluntarily and create incentives for the scope of cleared products to be widened as well.

### Initial margin for cleared OTC derivatives

Disclosures required of central counterparties (CCPs) by the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions cover initial margin totals. Using the data we can aggregate seven of the largest OTC derivative clearing services: CME IRS, Eurex OTC IRS, Ice Credit Clear, Ice EU CDS, JSCC IRS, LCH ForexClear and LCH SwapClear.

Figure 2 shows:

• House (or member) initial margin increasing from $82 billion to$88.3 billion over the same period, an increase of 8%.
• Client initial margin increasing from $93 billion to$107 billion from Q1 2017 to Q4 2017, an increase of 15%.
• A cumulative total of $196 billion of initial margin at end Q4 2017, so significantly larger than the$131 billion of cumulative uncleared initial margin in the prior section.
• It is also interesting to note the ratio of house to client initial margin is 45% to 55%, so while house margin contains the largest market participants – which are also the phase one, two and three firms in the non-cleared regime – the fact that client initial margin is larger is a reflection of the fact that these portfolios are more directional and so attract larger initial margin.

Now, in comparing cleared initial margin and uncleared initial margin, we have to be cognisant of the differences; in particular, in how netting operates.

### Multilateral netting

One of the most important benefits of central clearing is multilateral netting, meaning all my exposures can be netted down to one margin number, as opposed to individual bilateral margins against each counterpart. While this is of great benefit for variation margin, it is even more important for initial margin as the following figure illustrates.

Figure 3 shows:

• Variation margin that needs to be paid or received on a given day to each of four counterparties; A to D, the total of these is $35 million. • If these same position were all cleared at one CCP, the net variation margin payment would also be$35 million, so economically exactly the same.
• However for IM, the situation is very different, as the sum of the four bilateral IM amounts is $230 million, while if one CCP cleared all of these, the IM could be$100 million, so economically the market is much better off.

In reality, market participants cannot net all cleared OTC derivatives into one CCP, so does the illustrated multilateral example still hold?

The answer is yes, as while a market participant may use a handful of CCPs for OTC derivatives, generally less than 10, the same participant is likely to have bilateral derivatives exposures against a much larger number of counterparties, generally in the low hundreds.

Consequently, the grossing up of initial margin in each of those relationships as more and more firms are captured by uncleared margin rules is likely to increase regulatory initial margin more and more.

### Default resources

Before I end, it is worth mentioning CCPs also require their members to contribute to a defult fund. Below, we aggregate default resources for the same OTC CCPs, excluding Eurex, which has a combined default fund.

Figure 5 shows:

• Composition of the pre-funded and committed financial resources available to each of the CCPs.

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