For most of the past 18 months, the development of central clearing for OTC derivatives has been focused on the race between clearing houses and buy-side participation, or lack thereof, but now the clearing landscape is starting to finally take shape in the US and Europe.
The passage of the Dodd-Frank Wall Street Reform & Consumer Protection Act, and with Europe to soon follow suit with its own regulatory reform, offers the market some certainty that central clearing will be mandated. And now market participants are beginning take their positions.
Last week MPS Capital Services announced an agreement to clear interest rate swaps on LCH.Clearnet’s SwapClear service through broker, Barclays Capital. This agreement included the backloading of some of MPS’s historical interest rate swap transactions ($200 billion total notional value), of OTC interest rate swaps, which makes it the first major client to do so.
And so it begins, the pairing of buy-side firms and their appointed derivatives clearing members (DCMs) to clear legacy trades as well as manage future central clearing needs for OTC derivatives, such as credit default swaps (CDS).
Most of the major banks/brokers have announced the launch of central clearing services including Barclays and Goldman Sachs. BNY Mellon and NewEdge announced it has become a clearing member of International Derivatives Clearing Group (IDCG).
Thus, a secondary race has begun where brokers clamor to offer clearing services (often combining listed with OTC derivatives) to capture the piece of the pie.
Meanwhile, the clearinghouses continue to bolster services, instrument coverage and boast volumes cleared as competition heats up.
And earlier this year, NYSE Euronext has announced it plans to terminate its contracts with LCH.Clearnet in 2012 so it can offer its own clearing service operation for derivatives in London via Liffe.
On a related note, the IntercontinentalExchange, recently launched of Novation Consent = Confirmation (C=C) for the credit default swaps markets, which will be used to streamline the processing of CDS novations. Before central clearing well and truly kicks off as a permanent infrastructure in the OTC derivatives space, the US regulatory bodies need to establish the rules to support this new market structure.
This week the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) will be hosting two public roundtables to discuss issues related to the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The agenda for the roundtable suggests the regulators and a select group of industry participants will discuss swap data, swap data repositories (SDRs) and reporting.
Here is the link to the roundtable information if you wish to tune in.
Stay tuned for more news including the anticipated announcements from the European Union on derivatives regulation.