The vast majority of interest rate derivatives (IRD) were centrally cleared ahead of compliance with G-20-inspired rules by institutional investors, according to a new report by the International Swaps and Derivatives Association (ISDA).
The report estimates that around 90% of clearable IRDs were already being cleared by the end of the second quarter of 2013, based on data from The Bank for International Settlements, the Depository Trust & Clearing Corporation, LCH.Clearnet SwapClear, CME Group and the Japan Securities Clearing Corporation.
ISDA’s analysis suggests that US$42-55 trillion in IRDs remained to be cleared, around a tenth of the estimated global notional outstanding total of US$548-561 trillion.
The OTC derivatives industry body calculated that US$73 trillion of IRDs were non-clearable, either because the products or the currencies in which they are denominated cannot be cleared. The largest single non-clearable product was swaptions, with US$29.4 trillion outstanding.
Around 80% of the total US$10 trillion IRD notional outstanding in non-clearable currencies – which include the currencies of major developing economies such as Brazil, India, Korea and Mexico – are in instruments that would otherwise be clearable.
A further US$29 trillion on IRD transactions were conducted with non-financial counterparts that are not subject to clearing mandates, e.g. corporates.
ISDA also noted that portfolio compression over the past five years had reduced the notional outstanding of IRDs approximately 30%, based on figures from post-trade infrastructure and technology provider TriOptima. Compression reduces the total notional outstanding in the market by eliminating matched trades.
In the US, market participants designated as swap dealers, which included some active funds, were mandated to comply with the Dodd-Frank Act’s new rules on central clearing on 11 March 2013, but the majority of buy-side institutions were required to comply with subsequent deadlines on 10 June and 9 September. Europe is expected to require central clearing of OTC derivatives before the end of 2014, under the European market infrastructure regulation. Both pieces of legislation and other similar regulatory changes in Group of 20 countries respond to the call for greater transparency in the OTC derivatives markets made by G-20 political leaders at their Pittsburgh summit in 2009.
ISDA said that more research into the uses and benefits of non-clearable IRDS would help to “avoid policy prescriptions that may needlessly reduce liquidity in this market segment and adversely impact economic activity that depends on it”.