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It has always been one of the big unknowns of the regulatory overhaul of the derivatives market: which market participants will be clearing over-the-counter interest rate swaps?
Pension funds and asset managers have long been assumed to be the main parties who would be affected by the global move to take bilaterally traded OTC products on to electronic trading venues and through clearing houses. But on Thursday, Sparkasse Pforzheim Calw, a small German regional savings bank, said it too had begun actively clearing OTC interest rate swaps.
Pforzheim, together with Landesbank Baden-Württemberg, will use the SwapClear service, the Anglo-French clearing house being bought by London Stock Exchange.
It is significant since Pforzheim is not only the largest savings bank in the Baden-Württemberg region, but also the first German end-user client to clear its IRS business through a Landesbank. What also caught the eye was that it chose LCH.Clearnet ahead of a soon-to-be introduced service from Deutsche Börse’s Eurex derivatives business.
Pforzheim Calw, which had total assets of just €10.3bn at the end of December, expects to backload its entire portfolio with SwapClear by the end of the year. Nor will it be the last. As Heiko Cassens, director of SwapClear for Germany, Nordics and eastern Europe, noted: “We are seeing an increasing number of German clients adopting centralised clearing and look forward to broadening SwapClear’s reach within the German financial community.”
It is clear that while European requirements to clear OTC swaps through clearing houses may not become mandatory until well into next year, it is not just some of the biggest and most sophisticated pension funds that are well ahead with their preparations.
It also signals the battle to dominate clearing of the interest rate swaps market in Europe has truly begun. SwapClear is the dominant force, CME Clearing has arrived and the introduction of the EurexOTCClear service later this year brings a critical third entrant on to the scene. The Sparkasse Pforzheim agreement is a minor victory for LCH.Clearnet and London, the largest OTC market in the world.
However, it is a real concern that large banks are struggling to comply with tighter capital requirements. Collateral for trading and loans to businesses and people are being hit as they focus on the bigger, more pressing requirements such as Basel III requirements or servicing sovereign government debt.
But to hear a small regional German savings bank talk about “potential capital relief” and “efficient collateral management” suggests they too could be feeling the pinch. It should give policy makers and regulators pause for thought as they conduct their review of Mifid (markets in Financial Instruments Directive) and work out the technical details of the European markets infrastructure regulation, or Emir, collectively Europe’s answer to the Dodd-Frank act.
One of the consequences of putting OTC trades through clearing houses is that it requires the party to put up far more collateral than in the past. As a result, money is even more scarce. Like everyone else, Germany’s banks suffered in the credit crunch and two of the smaller Landesbanks, SachsenLB and IKB, were among the industry’s first casualties.
No one really knows the effects of the push to clear OTC instruments such as swaps. If other small regional banks follow Sparkasse Pforzheim’s well-intended lead but get into trouble, or the capital squeeze precipitates a pull back on lending and the new regulations are blamed, the political fallout will be intense.
It will be one of the issues to watch as the full extent of the new regulations, designed to rein in trading at the height of a boom, come into force during a prolonged economic downturn.
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