The Acceleration of Emerging Market Swap Clearing

AT A GLANCE

  • Chilean Peso, Colombian Peso and Chinese Yuan launch May 21
  • Market leading 24 currencies of IRS available for clearing
  • Over $35 billion per day cleared in emerging markets currencies in 2018
  • Korean Won IRS and Indian Rupee OIS launched in July and have been our best launch ever
  • Brazil Real CDI IRS now has 117 participants actively clearing and ADV hit a record $22.1 billion in May
  • Mexican TIIE IRS continues to expand with another 68 new participants since the start of 2017

As cost pressures continue to mount in the bilateral swap market, market participants have increased their voluntary clearing of OTC products. Since 2014, interest rate swap clearing in G4 currencies has increased 80%, while clearing in the 17 currencies outside of the G4 has soared 238% across the industry1.

Voluntary Clearing

The most common reasons market participants cite for voluntary clearing are that clearing offers:

  • better execution pricing
  • more liquidity providers
  • margin efficiencies with other cleared products
  • counterparty credit risk mitigation

In addition to these factors, the global implementation of uncleared margin rules is creating an even greater incentive for voluntary clearing.

As the market continues to realize the benefits of clearing, demand has built for central counterparties to deliver innovations by launching new cleared products to help alleviate some of the issues faced in bilateral markets. In response to this demand, CME Group launched rate swap clearing in Korean Won Interest Rate Swaps (IRS) and Indian Rupee Overnight Index Swaps (OIS) on July 10, 2017.

“Our focus is to provide better long-term liquidity, as well as counterparty, capital and operational efficiencies to market participants who are looking for solutions in the cleared space,” said Sean Tully, Senior Managing Director of Financial and OTC Products for CME Group.

Credit Suisse was the first clearing member to clear Rupee OIS.

“As our clients prepare for the implementation of uncleared margin rules, voluntary clearing is paramount to manage counterparty risk, gain capital efficiencies, and streamline operational processes,” John Dlubac, Director in Prime Services at Credit Suisse said in the announcement of the launch.

The voluntary clearing trend began to take shape in 2014, when Mexican peso TIIE swap clearing started to increase at CME Clearing. This activity accelerated in late 2016 when Brazilian Real CDI (BRL) swap clearing began scaling. BRL now has 117 market participants clearing the product, while average daily notional cleared reached a record $22.15 billion U.S. dollar equivalent in May this year.

The BRL launch took place in 2015 and this was a notable event because it solved the issue of clearing rate swaps in a non-deliverable currency. Since KRW and INR are both non-deliverable, CME Clearing can leverage our experience in BRL clearing, including the foreign exchange conversions and settlement procedures to exchange cash flows in U.S. dollar.

The Won and Rupee Enter the Fray

India and South Korea are the seventh and 11th largest economies in the world, respectively, with a combined gross domestic product of over $3 trillion. They have vibrant offshore trading of their interest rate swap markets with combined average daily notional traded of over $18 billion, per the BIS 2016 triennial survey.

After the July 10 launch, both currencies of rate swaps cleared within the first week and have continued to be, by far, the most successful new currency launches in CME cleared swaps. 44 participants have cleared in 11 months since launching.

“Clearing Korean won and Indian rupee swaps in the first week they’re available for customers is a testament to the strong demand from global clients and liquidity providers, particularly in Asia, to voluntarily clear these products”, says Tully.

Citi was one of the first to extend won and rupee swaps to their clients.

“We expect voluntary clearing to significantly increase as uncleared margin rules are implemented throughout the world,” said Thomas Treadwell, Citi APAC Head of OTC Clearing.

To date, 14 dealers and 30 buyside clients have cleared over $92 billion notional in Korean Won IRS and Indian Rupee OIS at CME - - as client adoption scales rapidly.

Colombian Peso, Chilean Peso and Chinese Yuan

Chinese Yuan (CNY), Chilean Peso (CLP) and Colombian Peso (COP) top the list as the most requested IRS currencies and so on May 21 we launched clearing of CNY IRS, COP OIS and CLP IRS and Zeros, bringing the total number of rates currencies for clearing at CME to 24. Within the first week we saw trades cleared in both Latin American currencies with volume of $4.3 billion and 10 dealers and 3 FCMs live2 .

Demand for Additional Currencies

As we have discussed voluntary clearing with market participants, it has generated some feedback about other currencies of interest rate swaps they would like to be cleared. We continue to run our risk analytics on the historical pricing data of potential currencies.

Rate Swap Currency

Daily Notional Traded ($B)*

CME Clearing Launch Date

CME Clearing 2017 Daily Notional ($B)

CME Clearing Total Participants

Mexican Peso (MXN)

25.5

December 9, 2013

17.4

187

Brazilian Real (BRL)

6.6

August 31, 2015

12

117

Korean Won (KRW)

12

July 10, 2017

63.2 total**

44

Indian Rupee (INR)

5.6

July 10, 2017

28.8 total**

Chinese Yuan (CNY)

10.1

May 21, 2018

   

Chilean Peso (CLP)

4.2

May 21, 2018

 

4.3 total**

 

13

Colombian Peso (COP)

1.4  

May 21, 2018

*Bank of International Settlements Triennial survey taken in April 2016
**Volume since launch

The takeaway from our discussions with participants is that the voluntary clearing trend is not slowing down anytime soon. That much is clear from the table above, showing the new OTC products introduced over the boom in cleared rate swaps since 2014.

 

1March 2018

2May 29, 2018

All other CME Group data as of May 31, 2018

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