The Acceleration of Emerging Market Swap Clearing


  • Market leading 21 currencies of IRS available for clearing
  • Over $21 billion per day cleared in emerging markets currencies in 2017
  • Korean won IRS and Indian rupee OIS launched in July and have been our best launch ever
  • Brazil real CDI IRS now has 98 participants actively clearing and ADV hit a record $12.5 billion in November
  • Mexican TIIE IRS continues to expand with over 50 new participants starting to clear it in 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 36%, while clearing in the 17 currencies outside of the G4 has soared 161% across the industry, from $77 billion per day in daily notional cleared to $202 billion per day in 2017.

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.

“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 98 market participants clearing the product, while average daily notional cleared reached a record $12.5 billion U.S. dollar equivalent in November 2017.

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.

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. 23 participants cleared in the first five months, compared to Brazilian real CDI swaps and Mexican peso TIIE swaps which took 11 and 13 months respectively to reach the same milestone.

“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, 10 sellside and 15 buyside clients have cleared over $8.5 billion notional in Korean Won IRS and Indian Rupee OIS at CME with $7.4 billion of it in November - as client adoption scales rapidly.

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.

Chinese yuan (CNY), Chilean peso (CLP) and Colombian peso (COP) top the list as the most requested, and we are currently working to run our risk analytics on the historical pricing data so we can launch these three currencies for clearing in the first half of 2018. This would bring the total number of rates currencies for clearing at CME Clearing to 24.

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 14.7 170
Brazilian Real (BRL) 6.6 August 31, 2015 7.6 98
Korean Won (KRW) 12 July 10, 2017 3.4 total** 25
Indian Rupee (INR) 5.6 July 10, 2017 5.1 total**
Chinese Yuan (CNY) 10.1 Q2 2018 not yet launched not yet launched
Chilean Peso (CLP) 4.2 Q2 2018 not yet launched not yet launched
Colombian Peso (COP) 1.4   Q2 2018 not yet launched not yet launched

*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.

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