CDSClear, part of London Stock Exchange Group’s clearing arm, is aiming to consolidate credit default swap clearing in Europe and expand in the US as ICE is shifting CDS clearing from London to Chicago.
Frank Soussan, global head of CDSClear and head of SA EquityClear & CommodityClear at LCH SA, told Markets Media: “The end goal is to consolidate CDS clearing in Europe and to grow in the US market.”
CDSClear expects to consolidate its market share in Europe as ICE has said it will stop clearing CDS in London in March 2023 and shift remaining activity into ICE Clear Credit in Chicago. Some European clients may not want to move clearing to the US, where they would be subject to US regulation.
Amir Khwaja, chief executive of derivatives analytics provider Clarus Financial Technology, said in a blog: “One to watch in subsequent quarters this year is to see when volume moves and how much moves to ICE Clear Credit and how much to LCH CDSClear.”
Moving stocks of cleared positions across CCPs is not straightforward but Soussan said it is feasible and CDSClear is looking at it right now. Clients need to trade out of their position from one CCP into the same position at the new CCP so CDSClear collaborates with dealers to help facilitate this for clients.
The dealer bank provides a price on a package of offsetting trades with one leg being cleared at the first CCP to close out the position and the other one with the new CCP to reopen the same position. As a result, there is no market risk for the dealer, just a potential impact on its initial margin at each CPP and the associated funding cost.
Global liquidity
Soussan argued that of CDSClear’s main differentiators is creating a single global pool of liquidity from Paris that will be appropriate for both clients of European clearing brokers and of US futures commission merchants (FCMs), as well as dealers and non-CDS market making banks, and provide portfolio margining benefits across a global product scope.
“It is similar to SwapClear creating a single pool of liquidity that is appropriate for both US and European clients out of London,” he said.
CDSClear is authorised in the European Union under EMIR, the central clearing regulation, and directly supervised by the SEC and the CFTC, the US regulators. This model allows both European and US market participants to choose the clearing model and the account structure relevant to their jurisdiction – and thus be compliant with regulation in their own jurisdiction while benefiting from a global liquidity pool and open access according to Soussan.
”A single pool of liquidity is a centrifugal force; more volumes lead to less bifurcation, and in this case less risk and less funding costs,” he said.
Bank of America NA is one US entity which is a direct member of CDSClear, and the business is working on onboarding other US direct members and FCMs. Soussan added: “We hope to announce more in the first quarter of 2023.”
He expects it will take time to build market share in the US. In Europe, LCH started to focus on CDS clearing in 2014-2015 and it took at least four years to be able to offer choice in the CDS clearing space and build the necessary piping.
“We are confident we are going to get there because our offering is innovative,” Soussan said. “The market needs choice based on true competition and we believe in an open approach.”
Market share
Soussan continued that by the end of June this year, CDSCLear had cleared €1.75 trillion of notional across index and single name CDS as well as index swaptions, about 72% of the total notional cleared in the record year of 2020.
Credit derivatives volumes were lower in the second quarter of this year than in the first quarter but massively higher than the second quarter of 2021, according to Clarus Financial Technology.
Khwaja said in a blog that ICE Clear Credit had 97.2% share of volume in US dollar credit derivatives in the second quarter of this year, unchanged from the same period last year.
He wrote: “LCH CDSClear with 0.4% in 2022 Q2, up from 0.2% in 2021 Q2.”
Market share for euro credit derivatives indexes was 60.9% for ICE Clear Credit in the second quarter of this year, down from 62.7% a year ago, according to Clarus.
Share for ICE Clear Europe rose to 26% from 22.7% in the same time period. LCH CDSClear had share of 13.1% in the second quarter, down from 14.6% in the same quarter last year, according to Khwaja.
In euro single-name CDS, ICE Clear Credit had 37.9% share in the second quarter, up from 35% in the same period last year. Share for ICE Clear Europe was 36.1%, up from 35.5% over the same timeframe and LCH CDSClear had 26.0%, down from 29.4% in the second quarter of 2021.
