Risk 25 firms of the future: Central counterparties

Clearing houses are the bit-part actors that find themselves thrust into a leading role – a result of the Group of 20 (G-20) nations pledge to overhaul over-the-counter derivatives markets and untangle the web of bilateral exposures that exists today. If central counterparties (CCPs) fluff their lines, the G-20 agenda may ultimately be judged a failure.

There is an obvious pitfall – while creating new hubs for bilateral risk may remove the opaque interdependencies that have been part of the OTC business to date, it also results in new points of vulnerability. There may need to be a guarantor for the guarantor, and central banks are the only institutions with deep enough pockets to play that role, but they are understandably wary of giving CCPs their overt backing. That means there need to be clear, sensible plans for the resolution of failed clearers. Those plans do not yet exist (www.risk.net/2192846).

Clearing Corporation of India Limited (CCIL)

India’s central bank has taken a cautious approach to the onshore OTC derivatives market, and CCIL reflects that attitude. It was one of the first global CCPs to start clearing OTC derivatives – its foreign exchange forwards clearing service dates back to December 2009 – and it has operated a repository for interest rate swaps since mid-2007. CCIL launched a trade repository for foreign exchange forwards and swaps in July and clearing for interest rate swaps is also due to start this year, effectively completing its clearing and reporting coverage of the local OTC markets. CCIL has also started running a compression service for interest rate swaps, in a move designed to limit the growth of OTC notionals. CCIL’s chief risk officer, Siddhartha Roy, is also vice-chair of CCP-12, the global industry group for central counterparties.

CME Group

The Chicago-based giant has a virtual monopoly on futures trading and clearing in the US and, with the expansion of its clearing offering to include both interest rate swaps and credit default swaps (CDSs), it has been able to start offering significant offsets between its futures pool and OTC rates products.

Eurex

Eurex is the dark horse of OTC clearing. It was one of the earliest CCPs to set up a CDS clearing service, but it gained no traction and eventually had to be mothballed. That has not ended the exchange’s ambitions. It plans to launch an interest rate swap clearing service imminently, offering margin offsets between swaps and its huge futures pool. Equity derivatives clearing will follow, Eurex says. And the exchange also has its own take on the protection of customer collateral,  potentially a big draw in the post-MF Global world. Dealers say if Eurex can get all of this right, it will join CME Group and LCH.Clearnet at the top table of OTC clearing.

Ice

Ice Clear Credit and Ice Clear Europe are the industry’s credit derivatives clearing houses of choice. Launched in 2009, Ice Clear Credit – the US version – was the first CCP to successfully take on large volumes of CDSs, and being an asset-class specialist means it has been able to focus and refine its operations. Dealers often cite it as the best-run and risk-managed OTC clearer. The big question is whether it can gain traction in other asset classes, a long-standing ambition.

Japan Securities Clearing Corporation (JSCC)

It is safe to say the JSCC will play a part in shaping the future of OTC clearing, if only because it benefits from a mandate requiring Japanese index CDSs to be cleared at a domestic CCP. While Japanese authorities say they will allow foreign clearers to compete in yen-denominated interest rate swaps, they will need a license and a local presence. The country’s clearing mandate is due to kick in this November, potentially making it the first country to satisfy its G-20 obligations.

LCH.Clearnet

The first OTC clearing house and the only one to experience the default of a clearing member, LCH.Clearnet’s SwapClear has a proud history. But can it keep its nose in front? To do so, it will need a strong franchise in the US, where the planned acquisition of International Derivatives Clearing Group from current owner Nasdaq OMX may help address lingering concerns among US market participants. It will also need to counter the cross-margining advantage that both CME Group and Eurex enjoy. That is the idea behind its talks with NYSE Liffe US and the Depository Trust & Clearing Corporation that could enable offsets between swaps, futures and cash bonds. For SwapClear, there is a lot riding on the initiative.

New York Portfolio Clearing

Originally founded as a tie-up that would allow margin offsets between interest rate futures traded at NYSE Liffe US and cash bonds cleared at the Depository Trust & Clearing Corporation, the so-called one-pot scheme could now be broadened to include OTC interest rate swaps cleared at LCH.Clearnet’s SwapClear.

Singapore Exchange (SGX)

SGX has ambitions to become Asia’s OTC clearing hub. It has a headstart over Hong Kong, has tried to establish itself in Australia – another G-20 member country – with a bid for the Australia Securities Exchange, and has made no secret of its hopes to interoperate with LCH.Clearnet. SGX has already started clearing non-deliverable forwards and interest rate swaps, and plans to broaden that product set.