DERIVATIVES-SEC approves LCH for single-name CDS clearing

By Helen Bartholomew

LONDON, Jan 20 (IFR) - The SEC has authorised LCH's credit default swap clearinghouse, CDSClear, as a registered clearing agency, enabling the Paris-based platform to offer single-name CDS clearing to US clients through futures commission merchants.

CDSClear is the first European CCP to be approved by both the SEC (Shanghai: 603988.SS - news) - which oversees security-based swaps including single-name CDS, and the CFTC - which oversees broad-based swaps including index CDS. CDSClear was authorised by the CFTC for index contracts in 2013 and gained EU approval under the European Markets Infrastructure Regulation in 2014.

"With (Other OTC: WWTH - news) the impending clearing mandate for CDS, our efforts have been focused primarily on Europe and onboarding as many clients as possible, but the ability to onboard US clients will allow us to build a truly global service," said Frank Soussan, global head of CDSClear at LCH. "Our offering for US persons was previously limited to indices, but now we can offer the full service with the broadest coverage of single names."

For the SEC, the registration was something of a landmark, representing the regulator's first approval of a clearing agency since 1984. All other clearing registrations since, including for the InterContinental Exchange (NYSE: ICE - news) that dominates CDS clearing, have been grandfathered.

"We've been in regulatory discussions for around two years and have worked closely with the SEC to obtain our registration. This approval will help to boost competition in single-name CDS clearing," said Soussan.

PRODUCT BREADTH

For CDSClear, which is part of Paris-based LCH SA - currently the subject of a £510m planned takeover by Euronext (Euronext: ENX.LS - news) - the approval could play a key role in its attempts to break ICE's stranglehold in CDS clearing.

ICE has cleared more than US$80trn in index and single name contracts through ICE Credit Clear and ICE Clear Europe since its 2009 launch. CDSClear has cleared just 961bn of gross notional since launch in 2012, but volume and market share have been rapidly growing.

Despite the lack of a regulatory mandate forcing single-name CDS into clearing, volumes have jumped in response to uncleared margin rules that came into force for the largest financial institutions in September. Under the new rules, contracts that are not cleared by central counterparties are subject to initial and variation margin, hiking the cost of bilateral exposures and driving a voluntary shift to clearing.

Cleared single-name volumes on CDSClear more than quadrupled in 2016 to 125bn notional, the majority of which came after margin rules came into force in September.

According to Soussan, The firm's market share in Europe has jumped from under 1% two years ago to as much as 25%-30% on some days. That growth has been supported by a broad product range and a single clearing framework that spans jurisdictions.

In addition to single-name constituents of key indices including CDX and iTraxx, CDSClear also offers clearing on senior financial names.

"Our product coverage has attracted the attention of US asset managers who frequently trade US and European names. Through CDSClear they can do that in a single framework" said Soussan. "Our unique coverage of senior financials has helped our market share, as banking names are among the most frequently traded."

In September 2016, for example, the CCP cleared more than 1bn gross notional on Deutsche Bank (IOB: 0H7D.IL - news) credit protection, capturing 100% market share on that name.

BUYSIDE EFFORTS

Buyside volumes have also been supported by a group of 24 global asset managers, including BlackRock (Sao Paolo: BLAK34.SA - news) , Citadel and Eaton Vance, which pledged a year ago to clear single-name contracts as part of a wider effort to revive flagging liquidity in the product.

Attempts to attract more buyside firms into clearing saw CDSClear offer "Select Membership" to non-dealer firms last year. Select members must meet all direct membership criteria but are exempt from mandatory end-of-day price contributions - a major hurdle for non-market makers that are typically price-takers.

Select members are also only required to bid on packages that they actually trade in the event of an auction stemming from a member default. Two clients have already signed up for the service, with one up and running, while an range of non-dealer firms have shown interest. (Reporting by Helen Bartholomew; Editing by Ian Edmondson)