Assessment of LCH Limited's SwapClear Service Appendix A: Activity in SwapClear

A.1 Global Activity

There were 111 direct clearing participants in the SwapClear service as at 28 September 2018, with direct participants domiciled in Australia, Canada, Europe, Hong Kong, Japan, New Zealand and the US. The number of direct participants has increased by around six per cent over the assessment period.

The notional value of trading activity grew over the past year, though more slowly than in previous years (Graph 5). The growth in activity over the past year was similar for interest rate swaps, forward rate agreements and OIS; together these products accounted for 96 per cent of trades registered in the 12 months to September 2018 (Graph 6). Growth was stronger in basis swaps, albeit from a low base. SwapClear also clears other products including zero-coupon swaps, variable notional swaps, non-deliverable interest rate swaps and inflation swaps.

SwapClear clears OTC interest rate derivatives in 21 currencies. About 51 per cent of trades registered are denominated in USD, 24 per cent in EUR and 12 per cent in GBP (Graph 7). Around 3 per cent were denominated in AUD, which was SwapClear's fourth most registered currency.

The stock of derivatives outstanding, as measured by notional value, rose moderately over the assessment period (Graph 8). The growth was due to the faster growth in the registration of new trades than that of the compression of existing trades and trades maturing.^[17]

Initial margin, which is an indicator of the level of risk the CCP manages, grew moderately over the assessment period (Graph 9). Changes in initial margin requirements reflect changes in participants' portfolios, as well as changes to the parameters of the initial margin model. Initial margin add-ons, which are called to cover risks not captured in the base initial margin model, grew substantially over the year and now comprise around 37 per cent of total initial margin posted by participants. The proportion of initial margin called from clients continued to increase over the assessment period (see Box A for a discussion of trends in client clearing in SwapClear).

A.2 Australian Activity

A.2.1 Australian domiciled direct clearing participants

Macquarie Bank Limited joined the SwapClear service in April 2018 (section 2.3.1). As at the end of September 2018, SwapClear had six Australian-domiciled direct clearing participants – Australia and New Zealand Banking Group Ltd, Commonwealth Bank of Australia, Goldman Sachs Financial Markets Pty Ltd, Macquarie Bank Limited, National Australia Bank Limited, and Westpac Banking Corporation.

The total notional value outstanding of interest rate derivatives (in all currencies) cleared by Australian banks via SwapClear grew by 16 per cent in Australian dollar terms over the assessment period (Graph 10).

A.2.2 AUD-denominated OTC interest rate derivatives

Globally, an estimated 87 per cent of all centrally cleared AUD-denominated OTC interest rate derivatives registered during the assessment period were cleared via SwapClear. In the assessment period, total AUD activity continued to increase, due in part to a shift towards clearing, as margining requirements for non-centrally cleared derivatives have come into force for some counterparties.

Activity in AUD interest rate swaps and OIS increased by 10 per cent in the assessment period (Graph 11). The notional value of AUD OIS registered fluctuates substantially; quarterly volumes of AUD interest rate swaps registered have also become more volatile over the assessment period. These fluctuations reflect in part trading activity based on market expectations of interest rates. As AUD interest rate swaps have longer maturities, they contribute more to the risk cleared by participants than AUD OIS. Basis, zero-coupon and variable notional swaps remain a small share of AUD activity.

A.3 Operational Performance

LCH Ltd targets IT system availability for the SwapClear service equivalent to at least 99.7 per cent which, in effect, means that system outages should last no more than 60 minutes in any one calendar month.^[18] SwapClear met this target in 10 months of the assessment period; IT system availability over the assessment period averaged 99.9 per cent.

The number of trades registered in SwapClear each month has increased by 15 per cent in the assessment period (Graph 12). LCH Ltd has met its target for maximum capacity utilisation of 50 per cent in each month in the assessment period for the SwapClear service. LCH Ltd deems its capacity utilisation target to be met if the service has the capacity to handle the greater of either (i) two times current daily peak throughput of trades registered over the previous two years, or (ii) the projected daily average throughput in 12 months' time.

Footnotes

Compression involves identifying offsetting trades in participants' portfolios and terminating them, while leaving those participants' market-facing exposures unchanged or within a predefined tolerance. Reducing the volume of trades outstanding reduces operational overhead and simplifies the default management process. For more information about the compression process, see Box A: Compression in the 2014/15 Assessment. [17]

LCH Ltd weights outages to calculate service availability: a weight of one where there is full service outage; a weight of 0.5 or 0.25 for partial outages, depending on the incident; and a weight of zero for losses of resilience (that is, when the service is still operating but, for example, an additional server used to share the load becomes unavailable). [18]