An announcement from IntercontinentalExchange (ICE) to offer cross-margining for OTC derivatives trades will push the industry further towards reducing the amount of initial margin required to clear OTC derivatives.
ICE was the most recent CCP to announce it would develop a cross-margining platform when the firm recently stated it would link up with the Depository Trust and Clearing Corporation (DTCC) as part of subsuming operations of recently acquired New York Portfolio Clearing into the ICE Clear Europe CCP.
Such an arrangement would let buy-side clients net off margin required for OTC derivatives with underlying cash products held at the DTCC, reducing the amount of collateral needed to be posted for swaps clearing.
The service would “offer capital efficiencies across a broader range of global interest-rate products,” the firm said in a statement, and signals the firm’s push into interest rate swaps (IRS) from its dominant role in credit default swaps.
“These services will be something that clearing houses will eventually have to offer to be competitive,” said John Omahen, vice-president, post-trade derivatives for financial technology provider SunGard. “But so far we haven’t seen a tremendous amount of usage of cross-margin functionality.”
The IRS space, which by far the dominate OTC derivatives by notional outstanding, offers the greatest ability to net off positions. On its website, Eurex Clearing, which has launched the Prisma service, lets participants cross margin between products and markets, with a focus on listed fixed income and OTC IRS products, which are pooled in the same guarantee fund.
But, having two distinctly separate asset classes in the one guarantee fund is operationally more difficult for US-regulated CCPs, which are mandated to hold the assets in different pools, Omahen said. But, there is also a possibility – although remote – that a large, failed IRS product could affect all participants in the guarantee fund – even those that trade only non-IRS products, like futures.
However, the competitive landscape of CCPs could depend on the ability to cross-margin products and reduce overall buy-side clearing costs.
“If they are successful with this, I can’t think of a participant that wouldn’t consider it,” said David Weiss, senior analyst at research consultancy Aite Group. “The potential to grow the IRS business is definitely possible.”
Weiss added ICE would potentially benefit from the animosity between the DTCC and derivatives-giant the Chicago Mercantile Exchange (CME) Group over trade reporting, which would reduce the likelihood of future linkups.
The CFTC granted the CME Group the right to run a swaps data repository, to which firms would be required to report swaps trades, after it challenged the Commission in court last year. The DTCC filed a lawsuit in May to reverse this decision, claiming the fragmentation of swaps data across multiple repositories would negate the aims of post-crisis regulation.
Clear future
One bulge bracket head of clearing told theTRADEnews.com the long-expected collateral crunch driven by central clearing had not yet hit, but asset managers were increasingly keen to view their clearing options to prepare for central clearing once SEF trading for certain contracts becomes mandatory in February.
He said a cross-margining optimisation product offered by the CME had already resulted in one asset manager seeing double-digit percentage savings for its initial margin posting by netting off positions in other asset classes.
According to the source, analytics tools that show which clearing houses offer the least capital-intensive clearing – including the use of cross-margining – will also increase, and he described these services as offering a “win-win” scenario for both buy- and sell-side firms.
“Analytics like these will only increase in importance as the buy-side looks to reduce capital requirements associated with central clearing,” he said.