Clearing house of the year: LCH

Asia Risk Awards 2018

Marcus Robinson

Three Asian currencies became available on LCH’s SwapClear for the very first time this year. The way Korean won, Indian rupee and Chinese renminbi interest rate swap trading through the clearing house then exploded speaks volumes for the importance of the additions for dealers in the region.

To date, roughly 16,000 trades representing slightly more than $1 trillion notional have been cleared across the three currencies. The clearing house knew from discussions with members there would be strong demand for clearing in those currencies. Nobody, however, guessed just how strong.

“We’ve seen very good take-up of clearing in those three currencies. It’s something our members and their clients are really embracing,” says Marcus Robinson, LCH’s Sydney-based head of rates and foreign exchange derivatives for Asia-Pacific. “We exceeded our initial expectation in terms of cleared volumes over the first months.”

The successful launch of non-deliverable interest rate swaps was one of the crowning achievements for LCH in a year that saw a dramatic expansion of products and services by the central counterparty (CCP) in Asia-Pacific.  

For emerging market rates traders, the service caused a stir not on account of breaking new ground but because they had access to a greater pool of liquidity. Other CCPs, notably Singapore Clearing House, have cleared the instruments for many years now, but to clear swaps in those three currencies at LCH is clearly a much bigger deal.  

“We have all been waiting for LCH to launch this, because the clearing house has a much wider membership and so you have more counterparties,” says an emerging markets rates trader at a European bank in Hong Kong. “That means your net exposure could be smaller.”

SwapClear’s non-deliverable interest rate swaps offer traders a way to hedge or speculate on interest rates in currencies that are restricted or have limited convertibility. Instead of physically exchanging the currency flows, periodic settlement is done on a cash basis in US dollars.

By clearing instead of trading bilaterally, dealers can make substantial regulatory capital savings and cut initial margin costs, which are higher for non-cleared trades.

We’ve seen significant client growth outside of the major financial centres, especially with regional banks in places like Taiwan, the Philippines, Malaysia and South Korea joining

Marcus Robinson, LCH

“I think the incentives to clear these currencies have been pretty strong,” says Robinson. “The liquidity pool is a big factor, but being able to manage and offset risks in other currencies is also a driver.”

Robinson also points to the launch of the first deliverable forex options clearing service at ForexClear as a landmark for Asia-Pacific in 2018. Forex options clearing is now available at LCH across eight currency pairs, including the three most traded in Asian hours – USD/JPY, EUR/JPY and AUS/USD.

Under ForexClear’s options service, physical settlement is delivered through a partnership with CLS, the central bank-regulated institution that provides settlement services to the forex market. The settlement calculations are supplied by LCH and executed separately by CLS.

This adds a little additional cost to LCH’s offering relative to a similar forex options service launched by CME Group earlier in the year, which uses cash settlement. Robinson believes market participants will be willing to swallow that expense to keep cleared options in line with the physical settlement practised in the bilateral market, and avoid a potential basis arising between client and interdealer trades.  

“We have been working with our members as well as CLS to establish a deliverable forex options clearing service. We designed the service to have a separate settlement session within CLS,” he says. “Obviously we’re very focused on mitigating settlement risk and – in extremis – default risk.”

He says they are pleased with the initial interest they have had from members in the service.

The expansion of the SwapClear and ForexClear product suite comes at a time when both services are growing rapidly in Asia-Pacific. SwapClear processed $874 trillion in notional in 2017, a 31% year-on-year increase that the clearing house says has been driven by significant onboarding and increased activity among members and their clients across geographies. ForexClear, meanwhile, processed more than $11 trillion in notional in 2017, up from roughly $3.2 trillion in 2016.

Robinson says growth has been similarly robust this year. The rapid increase in volume has principally come from regional banks in some of Asia’s smaller markets and buy-side firms in Australia.

“We’ve seen significant client growth outside of the major financial centres, especially with regional banks in places like Taiwan, the Philippines, Malaysia and South Korea joining,” says Robinson. “Whereas in previous years, volume growth has been driven mainly by existing members, this year we are now also seeing it coming from new customers – that is a huge step change.”