SGX mothballs US dollar swap clearing

SGX "dormants" US dollar swap clearing due to a lack of demand from member firms

SGX Centre 2 in Singapore

Singapore Exchange has said in a circular to its members that its central counterparty (CCP), AsiaClear, will suspend its service for clearing over-the-counter US dollar interest rate swaps due to lack of demand.

SGX was the first CCP in Asia to offer OTC derivatives clearing in 2011. While its main product is Singapore dollar interest rate swaps, it has also been offering US dollar rate swaps, the second most traded hedging tool among financial institutions in the city-state.

However, with low US dollar volumes to date, SGX has taken the decision to shelve the product saying in a circular seen by Risk.net that it will "dormant" the service on September 21. Frederick Shen, head of global treasury at OCBC in Singapore, says it is more attractive to clear dollar swaps at a global CCP for a variety of reasons.

"The majority of dollar swaps executed by local banks are with US and EU counterparties, as that's where the liquidity resides. They usually prefer to clear at LCH.Clearnet, rather than to split the margin and netting that LCH gives them by also clearing dollar swaps at SGX," says Shen.

Indeed, the most likely scenario where dollar swaps would be cleared at SGX would be between two Singapore-based banks that are already clearing their Singapore dollar swaps at SGX and therefore have their own netting benefits at the clearing house. But market participants say there are few deals of this type and in any case Singapore institutions have strong connectivity into the big CCPs.

We are committed to provide the clearing facility for US dollar interest rate swaps again should there be expressed intent by clearing members

"In Singapore, derivatives players such as regional banks, active managers and hedge funds are plugged into global CCPs for dollar swaps clearing," says a clearing source at an international bank. "This is a key difference when compared to a market such as Japan where many domestic players are not necessarily using offshore CCPs but are connected to JSCC [Japan Securities Clearing Corporation]."

While the move by SGX could be seen as a cost-cutting exercise – savings will be made in systems upgrades, default management and risk management – the exchange has not ruled out reintroducing dollar swaps clearing should demand pick up in future.

The circular seen by Risk.net says: "We are committed to provide the clearing facility for US dollar interest rate swaps again should there be expressed intent by clearing members and/or their clients to clear such products at SGX derivatives clearing or if there is development in the local regulatory front whereby the facility can serve the interest of our clearing members."

Market participants certainly point to the lack of a local clearing mandate as another reason why US dollar clearing has struggled to gain traction. The Monetary Authority of Singapore has proposed bringing in a mandate during the second half of next year, which would cover Singapore dollar fixed to floating swaps, linked to Singapore's swap offer rate, and their US dollar equivalents that are fixed to Libor. But the mandate would only apply to entities with gross notionals in excess of S$20 billion ($14.8 billion).

"If CCPs want to build their business they need regulatory support in the form of mandates that make clearing a requirement rather than just being optional. It's a big challenge for Asian CCPs to get into major foreign currencies especially dollar and euro as there are already very well-established incumbents in place," says Michael Steinbeck-Reeves, a Tokyo-based clearing, risk and regulatory consultant.

The clearing source adds that if a mandate had already been in place and if bigger volumes of non-deliverable forwards were cleared and settled in US dollars then local players would have a more stable business at SGX and have more of an incentive to also clear US dollar rate swaps there.

Later this month JSCC will expand its offering to include foreign currency rate swaps and despite SGX's experience, Steinbeck-Reeves says it may be in a better position. Apart from operating in a much larger market than Singapore, JSCC conducts more business with domestic clearing participants given the requirement to clear yen swaps onshore.

"At Asian CCPs such as JSCC, domestic positions are very directional so if there are offsetting positions in foreign currency then it may be more attractive to clear those foreign currency swaps locally," he says.

SGX didn't respond to a request for comment.