LCH.Clearnet Limited’s market-leading interest rate swap (IRS) clearing service, SwapClear, announced that it now clears approaching 50% of all outstanding over-the-counter forward rate agreements (FRAs). The rapid and broad adoption of FRA clearing since its introduction on SwapClear in December 2011 comes well ahead of mandatory clearing and reflects the market’s recognition of the value the product plays in cross-margining as an alternative to listed futures contracts.
FRAs are an important tool for offsetting short interest rate swap risk, and represent one of the most actively traded over-the-counter derivatives. SwapClear is the only service to offer clearing of OTC FRAs. Since the product’s introduction, the service has cleared more than USD 35 trillion notional, representing over 100,000 FRA trades in 10 currencies. On average, more than USD 350 billion notional is being cleared daily (July to date), with a record day of USD 1.27 trillion on July 17, 2012. The total notional outstanding volume of FRAs on SwapClear (USD 22 trillion) represents 43% of industry activity, based on the June 2012 BIS Quarterly Review.
“Cleared FRAs provide the industry with a liquid and highly correlated product offset for cleared short-end interest rate risk,” said Michael Davie, ceo of SwapClear. “Continually expanding our product range helps participants to maximize cross-margining and capital efficiency for over-the-counter interest rate derivative portfolios.”
The intensity and consistency with which the industry has voluntarily adopted FRA clearing demonstrates its desire to reap the benefits of clearing, regardless of the pending regulatory mandate. Mandatory clearing is expected to start with swap dealers in Q1 2013, with other market participants following throughout next year.
“FRAs are a valuable and necessary OTC alternative to listed futures. Now with the ability to clear FRAs, we are deriving even greater collateral efficiency from the use of these hedging instruments,” said Mike Curtler, global head of Money Market Derivatives at Deutsche Bank.
“The introduction of FRAs as a clearable product through SwapClear provides dealers and clients with the capability of cross-margining with interest rate swaps and provides increased margin efficiencies,” said Christian Mundigo, global head of Rates Trading & Co-Head of Fixed Income Americas at BNP Paribas. “This is a welcome development for the marketplace.”
Forward rate agreements (FRAs) are contracts in which two parties agree on the interest rate to be paid or received at a future date.
