A new central counterparty (CCP) for OTC derivatives being built by a consortium of Chilean banks is expected to begin clearing non-deliverable forwards (NDFs) from Q2 2013.
The banks have asked Combanc, operator of the country’s high-value payments system, to lead the project, but will establish a new company to run the CCP once live, with Combanc providing ongoing IT support. The new clearing house will run on a platform provided by Calypso Technology, a global financial software and services provider. Work will start on the project in August and Combanc expects the CCP to start clearing NDFs from May 2013, with interest rate swaps being added six months later. The details of the project were confirmed by Felipe Ledermann, CEO of Combanc, at SWIFT’s Latin American Regional Conference, held in Rio de Janeiro, Brazil, earlier this week.
The move will bring Chile in line with Group-of-20 mandated reform and standardisation of OTC derivatives resulting from the financial crisis. Globally, all major markets are developing mechanisms to standardise derivatives so they can be traded on exchange-like platforms with centralised clearing, designed to remove the traditionally perceived risks arising from bilateral trading of derivatives contracts.
Chile’s new CCP will follow principles laid out by the Bank for International Settlements (BIS). Message types have already been defined. Combanc is hoping to leverage SWIFT’s experience and expertise in working with other CCPs globally to exceed the BIS guidelines and is currently defining the role of the bank-owned global message network provider on the project. The current priority is to clear domestic instruments but the new CCP will include functionality to meet future cross-border clearing needs. In accordance with G-20 guidelines, Chile will also build a trade repository.
The CCP will need to accommodate an NDF market of approximately US$120.000 million in outstanding notional. The approximate collateral required by the CCP for a market of this size is US$650 million. The local and international banks backing the CCP have yet to confirm whether they will be direct or non-clearing members. It is estimated that banks will save US$210 million in capital requirements from clearing centrally compared with continuing to trade bilaterally.
Eliana Schwartz