Royal London Asset Management (RLAM) has cleared its first interest rate swap trades as part of the UK asset manager's adaptation to new over-the-counter (OTC) derivatives legislation.
The new rules, due to introduced at the beginning of 2013 through the European market infrastructure regulation (EMIR), will lead to the standardisation of OTC derivatives contracts so they can be traded on exchange-like platforms and centrally cleared. Under EMIR, all swaps trades will also need to be reported to newly-created data repositories.
RLAM cleared £550 million of vanilla interest rate swaps through Anglo-French central counterparty (CCP) LCH.Clearnet for internal clients and the firm is testing its external client clearing offering so pension fund clients can begin clearing swaps trades in Q1 2013.
Darren Bustin, head of derivatives at RLAM, said while pension funds have a three-year exemption from clearing OTC derivatives trades under EMIR, many of his firm’s clients were opting to use CCPs anyway.
Many pension funds use OTC derivatives to hedge certain exposures, such as interest rates. Under EMIR, trades sent to clearing houses will require initial and variation margin, posing a significant hike in costs for pension funds that have not historically paid the latter. The exemption gives CCPs time to develop new ways of meeting collateral requirements without using cash.
“The significant progress that RLAM has made in working towards centralised clearing of OTC derivative trades means that we are very well placed to meet our regulatory obligations under EMIR in 2013,” said Bustin. “It also means that we will be able to offer our external clients a comprehensive capability that has been fully tested in advance of the regulatory deadlines.”
Bustin added that RLAM was also in the process of legally onboarding three clearing brokers for its swaps market activity as well as ensuring the firm is in a position to begin complying with reporting requirements from 1 January, ahead of the 1 July regulatory deadline.