LCH.Clearnet plans to challenge Australian Securities Exchange (ASX) in its own backyard by signing up Australia’s major banks to its interest rate swaps clearing service, writes Jonathan Watkins.
The LSE Group-owned clearing house has emerged as the only challenger to the regional incumbent ASX as the country prepares for forthcoming over-the-counter clearing mandates to take hold.
LCH.Clearnet championed legislation allowing foreign entities to clear interest rate swaps in Australia, and subsequently launched there in July.
Since then, LCH.Clearnet has signed up the Australia and New Zealand Banking Group (ANZ) and the National Australia Bank (NAB), while it also has a deal in place to provide clearing for the ASX’s new exchange rival, FEX.
The clearing house is now hoping to turn the major Australian banks into full members of SwapClear.
Opening up competition
"We have worked closely with the Australian regulators and local market participants to define an OTC clearing solution which meets their G20 clearing commitments whilst enabling Australian banks to access the global OTC IRS liquidity pool,” said Marcus Robinson, director, LCH.Clearnet SwapClear.
"LCH.Clearnet's SwapClear service has been clearing AUD IRS for a number of years and already clears 99% of all cleared AUD IRS trades, representing 35% of the overall market.
“Even though the licence extension to cover Swapclear was granted in July 2013 and we now have two Australian banks as direct clearing members, the major Australian banks have been using client clearing services in SwapClear for more than two years.”
Client clearing is a construct by which banks provide clearing services to their clients including smaller banks, hedge funds and asset managers.
With the approval to launch, LCH.Clearnet became the second clearing house in Australia, as the Australian government sought to open up competition in the market.
The big four
The clearing house has now set its sights on capturing the rates business of the country’s big four.
Along with ANZ and NAB, this includes Commonwealth Bank (CBA) and Westpac.
ASX already has these firms on its clearing service, along with Citi, Deutsche Bank, JP Morgan and UBS.
Those eight banks account for 90% of the annual $15trn Australian dollar swap market, according to the exchange.
LCH.Clearnet is also hoping to secure the memberships of those banks.
"We're expanding our operations and regional headquarters in Sydney, to support plans to extend the service operating hours and the expected increase in demand for clearing services prior to the implementation of a clearing mandate in Australia and the rest of Asia-Pacific," added Robinson.
“In the last twelve months we have seen volumes cleared by Australian participants increase four fold, which shows that the Australian market is embracing clearing even before a mandate is enforced.
“We expect this number to continue to grow as other major Australian banks transition to direct membership."
LCH.Clearnet told FOW it is planning to extend its operating hours to cater for the Asia Pacific day as one of its key initiatives for 2014.
The clearing house is also hoping to implement local collateral arrangements so that Australian participants can post Australian dollars cash as initial margin and also use Australian securities in the local infrastructure as well.