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SwapClear Hopes to Crush Notions by $600trn

By Tom Osborn
November 25, 2014, Risk

Removing old bilateral records for cleared trades will allow CCP to ramp up its compression services, cutting notionals by as much as $300 trillion this year and next, the industry hopes.

The swaps market may be about to wriggle out of the leverage ratio's stranglehold, thanks in part to a radical new approach to trade compression that is being rolled out at LCH.Clearnet. The clearing house is aiming to slash the outstanding gross notional of interest rate swaps at its SwapClear service by $600 trillion over 2013 and 2014 – roughly equivalent to the current size of the entire rates derivatives market.

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CCP Fire Drills Lack Real-World Punch, Banks Say

By Cecile Sourbes
November 10, 2014, Risk

Dealers claim the current CCP fire drill process is flawed because it doesn't take into account that banks can be members of multiple CCPs

Fire drills conducted by central counterparties (CCPs) do not reflect the conditions of a real default scenario, dealers claim, since they are run by clearing houses on an individual basis when banks are often members of multiple CCPs.

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"Europeans Are the Problem" in CCP Oversight Standoff

By Peter Madigan
November 7, 2014, Risk

Clearing house representatives tell FIA conference that EU’s decision to withhold approval for US regime "has nothing to do with risk management concerns"

The European Commission’s (EC) refusal to recognise rules for US central counterparties (CCPs) as equivalent to those in the EU is putting market stability at risk. That is the claim of three CCP representatives, who were speaking during a Futures Industry Association (FIA) conference in Chicago this week.

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Clearing House Members Fear They May Have to Stump Up in Case of a Failure

By Philip Stafford
November 5, 2014 Financial Times

Post-financial crisis, regulators have been steadfast in their insistence that more of the derivatives market be passed through risk managers known as clearing houses. But many market participants worry about the implications of a failure of one these institutions.

Clearing houses, which stand between two parties in a trade, and guarantee it in the event that one party defaults, are meant to act as the financial markets’ shock absorbers.

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Eurex Puts Asia at Core of Growth Strategy

By Jon Watkins
October 21, 2014 The Trade

Eurex has outlined a medium-term plan, putting expansion into Asia and the growth of its OTC clearing business at the forefront of its ambitions.

The German exchange said it is in ‘advanced talks’ with regulators in Singapore to launch its clearing house, while cross-listing and market data deals with Asian exchanges are also on the horizon.

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ESMA Lightens Frontloading Burden

By Helen Bartholomew
Published October 4, 2014 IFR

Europe’s key derivatives regulator has reduced the burden that swaps counterparties face as part of a requirement to retrospectively load derivatives into central clearing. However, in its attempt to ease congestion, the European Securities and Markets Authority may have unleashed a new stumbling block for the industry.

In its final draft regulatory technical standards on the clearing obligation for over-the-counter interest rate derivatives, ESMA mandated four classes of swaps for clearing – similar to US requirements under the Dodd-Frank Act (see chart).

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Initial Margin Requirements to Grow By $1 Trillion

Published October 2, 2014 Markets Media

Initial margin requirements are expected to increase by more than $1 trillion by 2018 leading to a need to unlock dormant collateral held by institutional investors.

A joint report, “The Capital Markets Industry: The Times They Are A-Changin’ “, from consultants Oliver Wyman and Swift, the payment and messaging firm, said new regulations will cause significant growth in centrally cleared volumes and make collateral management more important.

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CME Faces Questions Over Pending Swaptions Service

By Tom Osborn
Published October 1, 2014 Risk

The interest rate swaptions market – bifurcated and largely illiquid – will not be easy to drag into clearing houses, although the benefits could be huge. CME Group hopes to launch a service, but dealers are viewing it with caution

They are tried and tested products, with a broad, loyal user-base, but when it comes to clearing, interest rate swaptions have so many quirks that one dealer describes them as "toxic waste". Buy-side demand focuses on European-style swaptions, leaving dealers structurally short on that portion of the market. In turn, dealers balance their portfolios using Bermudan-style or mid-curve swaptions, yield curve spread options and constant maturity swaps.

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Comment: The Standard OTC Oxymoron

Like many businesses, financial service providers grapple with a dilemma. On the one hand, they want to offer standardised products – and benefit from volume efficiency – while also striving to build a tailored service that offers more lucrative margins.

But post-crisis we have a new term to juggle; the paradoxically named “standardised OTC”. Over-the-counter (OTC) denotes something bespoke, while “standardised” suggests something “off the peg”. Investors like OTC contracts because they are tailored to meet a specific need.

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CCP Heads Warn Against Dangers of Cross-Product Margining

By Daniel O’Leary
Published September 24, 2014 GlobalCapital

Cross-product margin models at central counterparty clearinghouses must be focused on structurally correlated products to maintain clearing member access to funds in the event of a default.

Speaking at the 35th annual Bürgenstock Global Forum for Derivatives Markets in Geneva Wednesday, Daniel Maguire, global head of SwapClear, LCH Clearnet, warned clients must separate the reality from the brochures when choosing margin models. "Structurally correlated products can be offset through portfolio margin - it's on a spreadsheet," he said. "But I do worry that we go too far with this and put everything in this magical bar calculator. Remember that when the default happens, you've got to be able to go and trade."

 

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