Non-Dealer Swap Clearing Explodes Amid Volatility, Regulation
October 03 2011 - 3:33PM
Dow Jones News
Recent market volatility and pending regulatory changes have
prompted a sharp increase in the volume of credit default swaps and
interest rate swaps being cleared by CME Group's (CME)
over-the-counter derivatives processing service, the Chicago
exchange operator said Monday.
The surge in clearing for CDS, which function like insurance for
bonds and loans, and rate swaps comes more than a year after the
enactment of the Dodd-Frank financial market overhaul law and as
growing fears about contagion in the euro zone pressure stock and
bond prices.
"Some customers are increasing their activity as they are
getting more ready for the regulatory mandate and other customers
are more driven by market uncertainty," said Laurent Paulhac, CME's
managing director of over-the-counter (OTC) products and services,
in an interview.
Swaps between dealer banks are already cleared on a routine
basis, allowing clearinghouses like CME Clearing to stand between
the parties and guarantee payments in the event of a default. But
until recent weeks, non-dealer customers like investment managers
and hedge funds had not been clearing swaps, despite a mandate in
Dodd-Frank that will force some of them to do so for standardized,
clearing-eligible swaps by the end of next year.
Some complained the new clearing regime was too complicated from
an operational standpoint and they needed more time to understand
the process; others wanted to wait for regulators to specify which
swaps would be subject to the new regulations.
Now, more than a year after the enactment of Dodd-Frank,
necessity and fear seems to have made these issues
surmountable.
As of Sept. 30, CME has cleared more than $45 billion in OTC
rate swaps and CDS. The company also cleared $6.5 billion in
customer volume in CDS in September, surpassing the previous record
monthly total of $287 million in August.
CME's open interest in CDS is now $5.9 billion, up from $64
million when the service launched on Dec. 15, 2009 and up from
$78.5 million on Aug. 23. In early September, the open interest in
CDS jumped from $467.6 million to nearly $4 billion in just seven
trading sessions, CME data show, and on Sept. 14, a record $1.7
billion in CDS was cleared in a single day.
As of Sept. 30, open interest in rate swaps at CME stood at
$34.2 billion.
The open interest represents the amount of risk cleared and
remaining in CME's clearinghouse.
This speedy adoption by customers also has given CME a reason to
roll out additional capabilities in CDS clearing. It so far caters
to index CDS referencing series 9 to 17 of the CDX North American
Investment Grade index administered by Markit. Next, CME wants to
add clearing for the CDX North America High Yield index, pending
regulatory approval, beginning with series 11 to 17.
Paulhac declined to discuss which customers are behind the
clearing push, but said across interest rate and credit
derivatives, CME counts about 15 institutions or "buysiders" as
customers.
When CME formed its CDS clearing business in 2009 it announced
the following buyside institutions as co-founders:
AllianceBernstein, BlackRock, BlueMountain Capital Management,
Citadel, D.E. Shaw Group and Pacific Investment Management Company,
or PIMCO. Any direct relationship between the clearing activity
seen at CME and these firms could not immediately be
determined.
ICE Clear Credit, the U.S. CDS clearing house of Atlanta
exchange operator IntercontinentalExchange, has cleared "buyside"
or customer trades since December 2009, and has also seen an
increase in CDS clearing in recent days.
-By Katy Burne, Dow Jones Newswires; 212-416-3084;
katy.burne@dowjones.com
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