LCH Clearnet is expecting to see the first ever fall in the notional value of interest rate swaps it clears as the onset of tougher capital rules on investment banks has forced them to turn to its compression service.
As of the end of October SwapClear, LCH Clearnet’s interest rate swaps clearing business, had processed swaps valued at a notional of $406.9 trillion, compared to $426 trillion at the start of the year.
Compression services effectively ‘tears up’ contracts with notional values amounting to trillions of dollars by combining other trades with compatible characteristics
The first-ever drop comes as new capital rules, such as the Basel III leverage ratio, has caused banks and investors to re-evaluate how they use their swaps portfolios because it is becoming more expensive for them to hold large derivatives exposures.
As a result, banks have been driving to reduce the size of their notional outstanding trades, causing clearing houses such as LCH Clearnet and Eurex Clearing to provide portfolio compression services as a way to meet the Basel rules.
“Less really is more when it comes to notional outstanding…Market participants recognize that streamlining portfolios reduces leverage ratio, capital and risk as well as boosting efficiency at an institutional and industry level,” says Daniel Maguire, global head of SwapClear, LCH Clearnet.
“This is a trend which we expect to see accelerate in 2015.”
So far in 2014, SwapClear has compressed 1.95 million trades resulting in an overall reduction in its clearing members’ and clients’ number of trades outstanding from 3.2 million in January to 2.7 million as at the end of October.
LCH Clearnet Expects To See First Drop in Interest Rate Swaps Value
LCH Clearnet is expecting to see the first ever fall in the notional value of interest rate swaps it clears as the onset of tougher capital rules on investment banks has forced them to turn to its compression service.