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

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LCH.Clearnet’s interest rate swap clearing service, SwapClear, now clears approaching 50 per cent 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 USD35trn notional, representing over 100,000 FRA trades in 10 currencies. On average, more than USD350bn notional is being cleared daily (July to date), with a record day of USD1.27trn on 17 July 2012. The total notional outstanding volume of FRAs on SwapClear (USD22trn) represents 43 per cent 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,” says Michael Davie, chief executive of SwapClear. “Continually expanding our product range helps participants to maximise cross-margining and capital efficiency for over-the-counter interest rate derivative portfolios.”

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