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Cross-margining benefits help drive surge in pre-mandate clearing of OTC FRAs

New York, 23 July 2012

LCH.Clearnet Limited’s market-leading interest rate swap (IRS) clearing service, SwapClear, announced that it now clears approaching 50% of all outstanding over-the-counter forward rate agreements (FRAs). The rapid and broad adoption of FRA clearing since its introduction on SwapClear in December 2011 comes well ahead of mandatory clearing and reflects the market’s recognition of the value the product plays in cross-margining as an alternative to listed futures contracts.

FRAs are an important tool for offsetting short interest rate swap risk, and represent one of the most actively traded over-the-counter derivatives. SwapClear is the only service to offer clearing of OTC FRAs. Since the product’s introduction, the service has cleared more than USD 35 trillion notional, representing over 100,000 FRA trades in 10 currencies. On average, more than USD 350 billion notional is being cleared daily (July to date), with a record day of USD 1.27 trillion on July 17, 2012. The total notional outstanding volume of FRAs on SwapClear (USD 22 trillion) represents 43% of industry activity, based on the June 2012 BIS Quarterly Review.

“Cleared FRAs provide the industry with a liquid and highly correlated product offset for cleared short-end interest rate risk,” said Michael Davie, CEO of SwapClear. “Continually expanding our product range helps participants to maximize cross-margining and capital efficiency for over-the-counter interest rate derivative portfolios.”

The intensity and consistency with which the industry has voluntarily adopted FRA clearing demonstrates its desire to reap the benefits of clearing, regardless of the pending regulatory mandate. Mandatory clearing is expected to start with swap dealers in Q1 2013, with other market participants following throughout next year. 

“FRAs are a valuable and necessary OTC alternative to listed futures. Now with the ability to clear FRAs, we are deriving even greater collateral efficiency from the use of these hedging instruments,” said Mike Curtler, Global Head of Money Market Derivatives at Deutsche Bank.

"The introduction of FRAs as a clearable product through SwapClear provides dealers and clients with the capability of cross-margining with interest rate swaps and provides increased margin efficiencies,” said Christian Mundigo, Global Head of Rates Trading & Co-Head of Fixed Income Americas at BNP Paribas. “This is a welcome development for the marketplace."

Forward rate agreements (FRAs) are contracts in which two parties agree on the interest rate to be paid or received at a future date.

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About SwapClear

Established more than 12 years ago, SwapClear is LCH.Clearnet’s market-leading interest rate swap clearing service. To date, it has cleared more than 1.5 million OTC interest rate swap trades in 17 of the world’s largest currencies, and its membership currently stands at 66. SwapClear has a total notional outstanding of more than $306 trillion, with an additional $136 trillion eliminated through multilateral trade compression using TriOptima’s triReduce service. SwapClear has also cleared a cumulative client notional of over $1.68 trillion and is the only OTC clearing service to have successfully handled a significant OTC interest rate swap default, doing so when it resolved Lehman Brothers’ $9 trillion IRS default in 2008, resulting in no loss to any market participants. swapclear.com

About LCH.Clearnet

The LCH.Clearnet Group is the leading independent clearing house group, serving major international exchanges and platforms as well as a range of OTC markets. It clears a broad range of asset classes, including securities, exchange-traded derivatives, commodities, energy, freight, foreign exchange derivatives, interest rate swaps, CDS and euro- and sterling-denominated bonds and repos, and works closely with market participants and exchanges to identify and develop clearing services for new asset classes.

A clearing house sits in the middle of a trade, assuming the counterparty risk involved when two parties (or members) trade. When a trade is registered with a clearing house, that clearing house becomes the legal counterparty to the trade, ensuring financial performance of the trading parties; if one of the parties fails, the clearing house steps in. By assuming the counterparty risk, the clearing house underpins many important financial markets, facilitating trading and increasing confidence within these markets.

Initial and variation margin (or collateral) is collected from clearing members; should they fail, this margin is used to fulfil their obligations. The amount of margin is decided by the clearing house’s highly experienced risk management teams, which assess a member’s positions and market risk on a daily basis. Both the soundness of the risk management approach and the resilience of its systems have been proven in recent times. LCH.Clearnet is regulated or overseen by the national securities regulator and/or central bank in each jurisdiction from which it operates.

LCH.Clearnet Limited is a wholly-owned subsidiary of LCH.Clearnet Group Limited