November 6, 2012 8:27 pm

Barclays clears $5.3tn in OTC derivatives

Barclays has cleared more than $5tn of over-the-counter derivatives for its customers, with the pace accelerating as the market prepares to embrace mandatory requirements for reducing counterparty credit risk next year.

Under Dodd-Frank, centralised clearing of standardised derivatives is set to kick in early next year for big banks and heavy users and then expand across the broad market during 2013.

The clearing of derivatives is seen addressing counterparty risk that was thrust into the spotlight in 2008 by the bankruptcy of Lehman Brothers and the near failure of AIG, which required backing from the Federal Reserve to prevent losses for banks exposed to the insurer under derivative contracts.

By pushing swap trades to a central counterparty, or clearing house, credit risk is mutualised and the damage from the failure of a bank or financial institution mitigated.

Barclays began clearing trades for customers in interest rates, credit and foreign exchange in late 2009, with the trades being allocated to the three main clearing houses run by the CME, LCH and ICE.

Barclays’ Futures Commission Merchant attained $1tn in notional clearing volume in May 2012, which doubled to $2tn by August, and then hit $3tn in September and has now reached $5.3tn. The bank estimates that it has a 70 per cent share of customer clearing based on the $7.5tn volume published by the three main CCPs.

Ray Kahn, head of OTC clearing at Barclays, said: “The amount we are clearing at the moment is probably a tenth or less of what we expect to see in the future under mandatory clearing.” Barclays has cleared a notional $5.3tn of the $7.5tn that the three main clearing houses have publicly disclosed to date.

“The increase in clearing volume every month this year is pleasing in that it has allowed us to test our systems and operational infrastructure and prepare for greater volumes,” added Mr Kahn.

He said the vast majority of cleared derivative trades have been new transactions, with volumes split between US and European based clients. He said a number of the bank’s FCM clients, including hedge funds, asset managers, pension funds, insurers, government entities and other banks, were choosing to voluntarily clear before mandates require them to do so next year.

Clearing is a crucial first step for the more transparent OTC swaps market envisioned under Dodd-Frank. Next February, so-called category one users, who transact more than 200 derivative trades a month, are expected to start clearing their positions. They will be followed at three-month intervals by other users who are less active in trading derivatives.

The Commodity Futures Trading Commission wants banks and their FCMs to clear swap trades inside a minute next year so as to facilitate electronic trading that the regulator believes will bring greater price transparency to derivatives.

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