Clarus Financial Technology

Current Clearing Rates

CCP12 Incentives for Central Clearing

The CCP12 paper, “Incentives for Central Clearing“, includes an overview of OTC derivative markets. It is well worth a read as it goes into considerably more detail than we can in a blog. Amir gave a synopsis in an earlier blog post here.

The paper covers many of the nuances that may impact the calculation of how much of a particular market is being cleared. This is particularly important when considering Notional Outstanding as a measure. We continue to believe that Turnover offers a much better representation of market activity.

I recommend having a read of the CCP12 paper before having a look at today’s blog.

Transparency is still hard to come by for Uncleared Markets

It is that time of year when the latest BIS semi-annual survey of derivatives is released. ISDA got there first with a short overview , but the BIS commentary tends to be the most interesting part.

Crucially, as I have stated in past blogs, the BIS survey is only important for Uncleared markets. The Clarus data product, CCPView, is superior for cleared markets because it has no double-counting and offers far more granularity in the data. It also includes both Turnover and Notional Outstanding data. Contact us for more information.

The Evolution of Uncleared Markets

Let’s therefore take a look at the most important aspect of the BIS data – what is going on with uncleared volumes of derivatives?

Uncleared Interest Rate Derivatives

The largest part of the market by notional outstanding remains interest rate derivatives. Despite all of the noise surrounding uncleared margin rules, clearing mandates and the impending cessation of Libor, the death of uncleared markets has been very much over-reported. They remain alive and well!

Uncleared Interest Rate Derivatives

Some readers may be thinking how is this possible? If we have clearing mandates across the major jurisdictions, who is still trading uncleared derivatives? Are these just old trades that refuse to mature? The answers can be summarised as:

The net balance is to see a relatively stable stock of uncleared IRDs. Compression is not as effective in uncleared space due to CSA-specificity, and with the nature of participants more likely to be directional, it looks like this stock of trades is there to stay.

As the CCP12 paper concluded, it would be a fascinating study to learn more about these open positions and why they are not moving to clearing.

FX Derivatives

Onto the FX portion of the survey, which includes FX swaps/forwards, Options and Cross Currency Swaps. I was surprised to see that uncleared FX Derivatives are not quite as large as uncleared Interest Rate Derivatives:

Uncleared FX Derivatives

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Without any clearing mandates in FX, and NDFs only a small portion of the overall FX market, most of the open interest in FX markets is uncleared.

On which note, it is worth having a read of Jon Skinner’s recent posts to get a feeling for where FX markets are and how Clearing might fit into the picture – potentially as a post-trade credit exposure mitigation technique (much as it was originally designed to be in Rates markets).

Credit Derivatives

And now for Credit. This really is a different story:

Uncleared Credit Derivatives

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What is so different in Credit compared to Rates and FX? Off the top of my head:

Clearing Rates

Now we get down to the main motivation of writing the blog. Is the uptake of Clearing increasing in each of the asset classes? Reading the BIS commentary suggests that it has somewhat stagnated – but as the CCP12 paper highlights, this is probably due to highly efficient compression in clearing distorting the measurements when made by Notional Outstanding.

Nonetheless, let’s run the numbers across the asset classes. We use Clarus CCPView data for a single-counted view of Cleared markets versus the BIS data for Uncleared markets:

Clearing Rates by Asset Class as at end 2018

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Final Points

We strongly agree with the CCP12 paper that measuring clearing rates in this way is a misguided measure of the success of clearing.

Clearing Rates should be measured using turnover statistics.

Unfortunately, we have to wait for the next BIS Triennial Survey to update those figures, and weekly blog deadlines do not give me that luxury!

Therefore, I will leave the final comment to the BIS itself, who brings together a few of our blog topics very nicely (links changed from the originals to our Clarus blogs!):

The rise of central clearing has been an important structural change in OTC derivatives markets over the past decade. This change has gone hand in hand with an increase in trade compression – the elimination of economically redundant derivatives positions – both of which primarily affected interest rate contracts, driving down their market values. New practices such as settle-to-market – where banks, instead of posting collateral against the change in market value (ie variation margin), make outright payments to restore the market value to zero – have additionally contributed to the observed decline in their market values. Market values for foreign exchange contracts have been less affected by these developments, as only the non-deliverable forwards segment is cleared.

BIS: OTC derivatives statistics at end-December 2018

In Summary

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