LCH SwapClear, the interbank interest rate swap clearing service provided by London Clearing House, announced today that the maximum tenor of trades denominated in US Dollars, Euro, Yen and Sterling is being extended from 10 to 30 years. In addition, Swiss Francs are being added to the range of currencies cleared, for trades with a maximum tenor of 10 years.
LCH SwapClear announced simultaneously that ABN AMRO, Commerzbank Securities and JP Morgan have agreed to join the service, and expect to be live later this year. These new members bring the total number of participants in LCH SwapClear to 19. This is a further expansion of interest in LCH SwapClear following the adoption by the OTCDerivNet group of banks.
“ABN AMRO perceives clearing as the most effective way forward for interbank interest rate derivative trading and expects to enjoy increasing flows of business with the other SwapClear members,” says Graham Bird, Global Head of Interest Rate Trading at ABN AMRO . Rob Standing, Head of Rates for Europe at JPMorgan adds: “We are delighted to join SwapClear and are looking forward to growing our business further whilst continuing to reduce risk and overheads in our interbank swap business.” And Stphane Rio, Head of European Interest Rate Swaps at Commerzbank Securities concludes: “We look forward to the enhanced credit capacity and risk reduction that clearing the main part of our interbank swap portfolio will facilitate.”
Originally launched in September 1999, LCH SwapClear is designed to be used by the major global swap dealers to reduce the risk and processing costs of high volume flow trading and market making in the interbank interest rate derivatives market. LCH SwapClear can help banks free up credit lines by collateralising all cleared trades with daily movements of variation margin. This also aims to give an incentive to members to send their new trades into clearing as quickly as possible , and to transfer existing portfolios to SwapClear. T he transaction matching process , recently enhanced through the use of the SWIFT messaging system and messaging protocols established by OTCDerivNet, SWIFT and LCH, has also become more efficient.
“No other industry initiative has attempted to clear the volume of pre-existing bilateral trades that exist in the swaps market, which is made even more challenging because of the complexity of swaps ,” explains LCH. “LCH and OTCDerivNet have worked together, over the past year, to establish common rules and procedures to develop standardisation of processes that facilitate this effort. “
LCH SwapClear currently has trades with an aggregate notional principal in excess of $3 trillion in the service and with the introduction of 30 year clearing more backloads are expected shortly, as members finish their implementation and testing.
“Volumes from back-loaded trades from existing bilateral portfolios and new business being presented for clearing are increasing strongly as our newer members complete their implementation process ,” says David Hardy , chief e xecutive of LCH. ” Adding the extension to thirty years and Swiss Franc swaps out to ten years maturity will allow members to load up a further important segment of their swap book, leading to fresh capital, credit and operational savings. At the same time, we are delighted that we can welcome new members of such calibre, further confirmation of the key position that SwapClear has established in the industry post-trade infrastructure.”
The service and membership extension was also endorsed by OTCDerivNet Ltd, whose 12 members are participants in the SwapClear programme. Stephen O’Connor, Managing Director, Morgan Stanley and Chairman, OTCDerivnet Ltd, said: “With the new members and the introduction of the maturity extension to 30 years, many houses will be able to clear the majority of their global interbank swaps business through the LCH SwapClear system. This has both risk reduction and operational cost benefits. With regard to risk, each member will now face only one, fully margined, central counterparty, instead of 18 counterparties bilaterally; significantly reducing systemic risk in the swaps market. From a cost and efficiency perspective, sending trades as electronic messages via SWIFT into SwapClear greatly reduces back office workloads, transaction discrepancies and documentation errors. From the users’ point of view, LCH SwapClear continues to be a tremendous success story. OTCDerivNet looks forward to working closely with LCH to further increase product scope in the near future.”
OTCDerivNet Limited is a limited liability company equally owned by Bank of America, Barclays, BNP Paribas, Citibank/Schroder Salomon Smith Barney, Credit Suisse First Boston, Deutsche Bank, Goldman Sachs, Merrill Lynch, Morgan Stanley, The Royal Bank of Scotland, Socit Gnrale and UBS Warburg.
The founding banks started working with LCH in 2000 to implement SwapClear within their firms and to work with LCH in developing and promoting automation within the swaps market. In March 2001, the eight founding OTCDerivNet banks registered an initial tranche of approximately 4,250 swap trades into LCH’s SwapClear system, with a notional principal in excess of $250 billion. This was the first instalment of an on-going programme, involving the clearing of existing bilaterally negotiated trades. Since then over 20,000 trades have been backloaded and further batches are expected to be loaded in the coming months.
OTCDerivNet Limited was set up to partner with LCH to use LCH SwapClear to develop a secure, efficient and cost-effective, post-trade dated operational environment for the benefit of the OTC derivative industry.
OTCDerivNet Limited provide strategic direction and funding for the development of extensions to the LCH SwapClear service and is working very closely with LCH to extend the existing range of clearable OTC derivative transactions and promote broad market participation globally.