sheet intensive business. Banks
do not necessarily want to clear
such business, and the knock-on effect of taking that off of
the balance sheet is reducing
the pools of concentration at
the CCP, because your book
of risk no longer sits within
the account at JP Morgan or
Morgan Stanley, rather it sits at
your own account at the CCP.
It is basically agency clearing
and I think that is the future of
Caution is required though
as clearing members do not
want just any type of buy-side
member to gain direct access,
especially with swaptions being
mandated for clearing. There is
certain risk being forced onto
CCPs, and the banks are quite
right to support an agency
clearing model but just for specific clients.
away if we sort out the leverage
ratio issues and the other side-effects of the capital rules which
impact on clearing brokers.
CL: When Citadel became a
member of LCH I thought that
would be the start, but I have
been surprised there hasn’t been
more to take the same step of
becoming a direct clearer. If you
have the scale, the impediments
have been reduced as far as barriers to entry to clearing. I am
still optimistic there is going to
be more scope for the buy-side
to be direct clearing members.
RM: I think the Eurex ISA
Direct scheme is fantastic,
and much needed but only
for particular clients such as
pension fund or life insurance
companies that have a huge
book of long-dated balance
want to do the same with my
inflation swaps? If not I would
end up bifurcating margin
requirements and risk between
the cleared and bilateral world.
RM: You are right you do get a
bifurcation within your portfolio, there is a tremendous mathematical equation that needs to
be performed there to see what
the best outcome is when posting initial margin.
JP: At what point does direct
clearing become attractive
for the buy-side?
BH: I think it works for some
clients, but not all. Some of the
big pension funds have realised
they won’t get their business
cleared without going direct.
For me, I think the idea of
direct clearing will actually go
When Citadel became a member of LCH I
thought that would be the start, but I have
been surprised there hasn’t been more to take
the same step of becoming a direct clearer.
Christian Lee, head of risk & clearing desk, Catalyst