BNY Mellon Sees Opportunity in Uncleared Swaps Following Clearing Exit

Following BNY Mellon’s decision to exit the derivatives clearing business in Europe and the U.S., it now sees an opportunity in the $170 trillion uncleared swaps market.

Market participants are gearing up for the December 2015 deadline whereby large banks and swap dealers will have to post initial and variation margin for non-centrally-cleared trades. This has led to a lot of discussion on who will be responsible for calculating the margin and who will collect it for the trade.

“The tri-party segregation model is being increasingly talked about in the uncleared derivatives space,” says Mark Higgins, managing director for Global Collateral Services, BNY Mellon.

Tri-party segregation has been increasingly used for cleared derivatives. In March this year, BNY Mellon implemented the model for Bank of America Merrill Lynch to allow it to utilize corporate bonds as collateral at CME Clearing.

Following these developments with its tri-party platform, Higgins sees an opportunity for BNY Mellon to harness this for the incoming margin mandate for uncleared swaps.

“The cleared environment in Europe is becoming more intense as we get closer to 2015 deadlines for mandatory clearing, additionally the market for non-cleared is gaining focus and is certainly very interesting for us, with the resulting need to hold segregated independent amounts,” he adds.

“This presents us with an opportunity to leverage our existing tri-party platform to manage margin for our clients’ uncleared swap exposures.”

In October, BNY Mellon decided to close its European exchange-traded and OTC derivatives clearing business as a result of the delay to mandatory central clearing. It also shut its U.S. swaps clearing unit last year, citing it had not been profitable and incurred substantial funding chargers over the last couple of years.

As well as BNY Mellon, last week State Street announced it would shut down its U.S. swaps clearing business, and decided to pull the plug on the launch of a European OTC clearing unit.

Due to market and regulatory factors, it has become increasingly expensive for banks to be active in swaps clearing. Furthermore, with clients of the banks using standardized futures contracts more than swaps due to margin efficiencies, it is becoming less profitable for custodians to remain in the space.