The world’s top futures exchanges have been unable to shift the OTC derivatives world onto listed platforms, largely due to compression services launched by clearing houses, according to the chief executive of the London Stock Exchange Group (LSEG).
As a result of tough new rules on OTC derivatives such as central clearing, as well as changes in market structure, it was widely assumed that margin costs will lead to interest rate swaps becoming “futurised” on listed exchanges.
However, according to Xavier Rolet, head of the LSEG, the exact opposite has happened, largely due to new innovations such as compression services.
“Our OTC clearing pool offers true unlimited compression services and efficiencies that none of the futures exchanges, even if you put them together around the world, can offer. The power of compression within OTC is huge,” Rolet said on an earnings call.
According to its end of year results, SwapClear, the coveted interest rate swaps clearing service provided by LCH.Clearnet, had compressed $328 trillion of notional volume in the OTC derivatives market.
Portfolio compression, which enable banks to offset compatible trades and therefore wipe off trillions of dollars in notional volume, are increasingly being adopted by banks as a means to reduce exposures and post less capital.
As a result, banks have been less inclined to move to swaps futures products that have been recently launched by the likes of Eurex and CME.
“In the last 18 months we have seen the opposite of those [futurisation] expectations. There hasn’t been a futures exchange that has taken a share of OTC derivatives or into their cross-margining services,” added Rolet.
“We have seen that the futures exchanges have not been able to shift to OTC… and we expect the same to happen as client clearing begins.”
According to its results, SwapClear now holds almost a 95% share in the USD swaps clearing market.