LCH sees buy-side boost in inflation swaps clearing

Buy-side cleared inflation swaps volumes have rocketed since 1 September with dealers offering cheaper prices.

LCH has seen a huge increase in asset managers and hedge funds voluntarily clearing their inflation swaps, following the onset of stricter collateral rules on bilateral derivatives.

Last week LCH reached a record $1 trillion in notionally cleared inflation swaps since the launch of the voluntary service in April last year.

With the implementation of the initial margin rules for non-cleared OTC derivatives in the US, Canada and Japan in September, banks and swap dealers are encouraging their buy-side clients to shift to a cleared market.

“We have seen a 400% increase in buy-side volumes alone [for inflation swaps clearing] because the dealers are quoting a more efficient price and there is greater access to liquidity,” said Cameron Goh, global head of product management for rates & FX derivatives at LCH.

“Some buy-side firms are even clearing a greater portion of their inflation swaps than their interest rate swaps, because the inflation market has completely switched to clearing.”

According to Goh, in the interdealer market around 95% of the inflation swap market is now cleared, with the initial margin rules acting as an incentive to migrate to clearing.

Swaps dealers are quoting better prices for their buy-side clients because it allows them to avoid the higher costs in the bilateral market.

“What is happening now is as the inter-dealer market has moved to cleared, if the client chooses to clear, the dealer can net that dealer-to-client trade with their inter-dealer trade, therefore reducing their funding costs, [and] potentially resulting in the emergence of a basis that is reflected in execution pricing between uncleared and cleared inflation swaps,” adds Goh.

The average monthly notional value of cleared inflation swaps increased from $36 billion prior to the rules, but since then the average has shot up exponentially to $170 billion.