The International Swaps and Derivatives Association (ISDA) has determined that approximately 90% of the interest rate derivative (IRD) market that can be cleared is in fact cleared, showing that through a combination of regulatory mandates and incentives, clearing is becoming the norm.
For its analysis, ISDA reviewed data from Bank for International Settlements (BIS), Depository Trust & Clearing Corporation (DTCC), LCH.Clearnet’s SwapClear service, CME Group and the Japan Securities Clearing Corporation (JSCC).
In addition to finding that most products eligible for clearing are cleared, ISDA found that of the entire ISD market, only 13%, or around $73 trillion, is made up of non-clearable transactions. This includes $65 trillion in products that cannot be cleared, and $8 trillion in products that can be cleared but are denominated in currencies that cannot.
ISDA also found that the size of the market has been reduced by around 30% through compression, which reduces notional outstanding by eliminating matched trades or transactions that do not contribute risk to a dealer’s portfolio. “The benefits of compression include reductions in counterparty credit exposure, operational risk and cost, as well as lower legal and administrative expenses in the event of a default of any participating dealer. Importantly, since contracts are actually eliminated, under some regimes capital costs can be reduced,” explains ISDA.
“Despite this progress, there continues to be misunderstandings and misperceptions about the segment of the IRD market that cannot and will not be cleared,” the group says.
Swaptions, cross-currency swaps and options make up the largest amount of non-clearable options.
“More research and analysis needs to be conducted to understand the uses and benefits of non-clearable IRDs. This will help to avoid policy prescriptions that may needlessly reduce liquidity in this market segment and adversely impact economy activity that depends on it,” ISDA adds.
ISDA Finds Most Interest Rate Derivatives Are Already Cleared
The International Swaps and Derivatives Association (ISDA) has determined that approximately 90% of the interest rate derivative (IRD) market that can be cleared is in fact cleared, showing that through a combination of regulatory mandates and incentives, clearing is becoming the norm.