Eurex Clearing, the central counterparty (CCP) owned by Deutsche Börse, has successfully cleared interest rate swap (IRS) trades on behalf of two of Europe's largest buy-side firms.
London's Insight Investment Management and OFI Asset Management in Paris have begun client clearing of IRSs through the EurexOTC Clear service, with UK bank Barclays acting as the clearing broker in both instances. The CCP has also revealed that European hedge fund Whard Stewart will use the IRS clearing service with J.P. Morgan acting as the clearing member.
Eurex's IRS clearing service was launched on 13 November and offers a fully integrated clearing and collateral service for swaps and listed derivatives through a single framework. Eurex Clearing plans to expand the service later this year as part of preparations for the European market infrastructure regulation (EMIR).
EMIR requires OTC derivatives to be cleared through CCPs and reported to newly-created trade repositories. Mandated clearing of swaps is not expected to come into force until summer 2014 and many swaps will be traded on exchange-like platforms under new rules in MiFID II.
Establishing new models for client clearing – and in particular how assets will be protected in the event of a counterparty default – has been a focus for the buy-side since the new regulations were introduced.
"OTC swaps are critically important to the successful management of our clients' liability risks. Insight Investment, and our strategic back-office provider, Northern Trust, has demanding clearing requirements which prioritise efficient margin management and effective asset protection for our clients," said Andrew Giles, co-CIO at Insight Investment. "We are therefore highly motivated to support CCP models that are innovative in recognising the specific current and future clearing needs of our institutional clients and the wider long-term savings industry."
While market participants are progressing their preparations for the new swaps rules, there are still challenges that need to be resolved by the industry.
"One of the biggest challenges the industry faces is the timely definition of a comprehensive standard client documentation," said Bernd Mack, executive director and a project leader at Eurex. "This will be particularly important for buy-side firms that are assessing the capabilities and processes of clearing members and clearing houses in effectively deploying alternative asset segregation and margining functionalities."
As well as gearing up to seek authorisation under EMIR, once the technical standards underpinning the legislation are formally approved by European policymakers, Mack says Eurex will focus on growing the instruments it offers for trading.
"We plan to expand the range of products we offer by adding more currencies, maturities and instrument types related to interest rate swaps and forward rate agreements," he said. "We are also looking at innovative solutions for delivering alternative variation margin mechanisms for buy-side clients."