LCH SwapAgent will expand into new currencies this year as the total notional registered with the firm, which processes trades in the over-the-counter bilateral rates and foreign exchange markets, has reached more than $1 trillion (€900bn) since launch.
The London Stock Exchange’s clearing unit, LCH, launched SwapAgent in 2016 as regulators introduced the the first phase of a new regime requiring the exchange of margin for non-cleared derivatives, making margin payments more expensive and capital intensive. This month LCH SwapAgent said trades had exceeded $1 trillion in notional since launch.
Nathan Ondyak, SwapAgent
Nathan Ondyak, global head of LCH SwapAgent told Markets Media: “The primary driver of the rise in volumes is the desire to simplify the workflow for non-cleared derivatives markets, in addition to the uncleared margin requirements.”
LCH SwapAgent offers standardized infrastructure and efficiencies for non-cleared interest rate swaps, cross-currency swaps, inflation swaps and swaptions.
Ondyak continued that banks have the opportunity to optimise their workflows as trades are automated from end-to-end on SwapAgent, and they also have product fungibility and the ability to compress trades.
Compression allows clients to “tear-up” offsetting trades in their portfolios to reduce the notional outstanding and the number of line items in their portfolio while maintaining the same risk exposure, reducing their capital requirements. In January LCH SwapAgent said that for the first time, trades were successfully compressed in TriOptima’s multilateral USD/EUR cross-currency swap compression cycle. During the run, SwapAgent and non-SwapAgent trades were blended together to achieve maximum benefits.
“We are in the early stages of SwapAgent becoming the market standard in these products,” Ondyak added.
Despite reaching the $1 trillion mark, Ondyak said SwapAgent has room for growth in the inter-bank market as firms backload legacy swaptions and cross-currency swaps, as well as processing new trades.He said: “We have seen volumes rise by around 20% over the last two weeks.”
In addition SwapAgent will be extending into new currencies.
“We are aiming to add Scandinavian cross-currency swaps in April and Mexican Peso, Hong Kong and Singapore dollars over the summer,” said Ondyak.
Libor transition
SwapAgent members are affected by regulators’ push to move away from the Libor benchmark.
After the financial crisis there were a series of scandals regarding banks manipulating their submissions for setting benchmarks across asset classes, which led to a lack of confidence and threatened participation in the related markets. As a result, regulators have increased their supervision of benchmarks and want to move to risk-free reference rates based on transactions, so they are harder to manipulate and more representative of the market.
The UK has chosen the sterling overnight index average, Sonia, as its risk-free rate. The Bank of England and the Financial Conduct Authority have encouraged market makers to use Sonia as the standard reference rate for sterling interest rate swaps since March 2 this year.
https://twitter.com/LCH_Clearing/status/1194973236116807681
“We have consulted with members on the fairest way to facilitate the transition and change our rule book,” said Ondyak. “For bilateral transactions it may be onerous for many to transition to a new rate but SwapAgent is helping standardise the market.”
For the Libor transition, SwapAgent will be changing the discount rates for portfolios at the same time as LCH.
Ondyak said: “€STR will begin to be used as the discount rate for relevant euro denominated contracts in June and SOFR for US dollar contracts in October.”
The European Central Bank began publishing its new benchmark, €STR, the euro short-term rate, for the first time in October last year. The previous benchmark, EONIA, has been redefined as €STR plus a fixed spread of 8.5 basis points. The US has adopted the secured overnight financing rate, SOFR, as its risk-free rate to replace US dollar Libor.
Derivatives survey
The approaching Libor transition, continued rollout of uncleared margin rules, ongoing concern about capital requirements, and a renewed focus on clearinghouse “skin in the game” are on the minds of most derivatives market participants according to a new survey from Greenwich Associates.
https://twitter.com/GreenwichAssoc/status/1237700123116933120
The consultancy conducted a study in partnership with FIA, the association that represents banks, brokers, exchanges, and other firms in the global derivatives markets, and surveyed 189 derivatives market participants between November 2019 and January 2020.
The study, Improved Cross-Border Access, Increased Competition Biggest Requests of Derivatives Market Participants, found that the cost of capital remains front and center for derivatives market participants.
End users are more focused on the transition away from Libor, expected in 2021, and the implementation of the final phases five and six of the uncleared margin rules over the next two years.
Kevin McPartland, Greenwich Associates
“While the exact number of buy-side firms impacted by UMR is still debated, the complexity of renegotiating long-established derivatives documentation between counterparties and putting in place new third-party custodial agreements has proven extremely time-consuming,” said the study. “Such operational issues are, of course, on top of the real economic impact of posting initial margin in places where it was not required before.”
The cost of that capital could prove to be a major economic disincentive to using uncleared derivatives.
Market participants are also aware that the transition away from Libor will have a big impact on the interest-rate derivatives markets. However, only 21% of end users participating in this study feel prepared and have a migration plan in place.
Greenwich concluded that operational efficiency will be key to the derivatives industry’s continued success.
“For clients, this is a top priority—more important than even fees,” said the report. “Clearing firms are well aware of this, and in the coming years, the investments they are making to improve the quality of their internal workflows and client service will start paying off. Ultimately, a more efficient end-to-end trading and clearing process driven by technology innovation will ensure growth over the next decade and beyond.”
AcadiaSoft partnership
In 2018 LCH SwapAgent formed a partnership with AcadiaSoft, which automates margin payments for counterparties engaged in collateral management around the globe. They agreed to collaborate to simplify the operational process for margin calculation.
https://twitter.com/AcadiaSoft_/status/1177248408005951493
AcadiaSoft is owned by 13 banks and three industry infrastructure providers – NEX Group, The Depository Trust & Clearing Corporation and Euroclear.
LCH SwapAgent provides its independently calculated collateral information to the AcadiaSoft Hub, which is used by both sell-side and buy-side firms, and be integrated through a single interface, dashboard and point of control.
Chris Walsh, chief executive of AcadiaSoft told Markets Media at the time: “We are developing a platform that is transformational. The industry can move from counterparties using two separate calculations to one agreed calculation which will eliminate disputes.”
Walsh continued that disputes and inefficiencies can cost tens of millions of dollars, but the industry could save billions of dollars through using collateral and capital more efficiently.
