Surely you’ve heard about the CME launch of cleared swaptions this week – quite an important milestone in the progress towards maximizing capital efficiencies and minimizing counterparty credit risk.
The CME press release can be found here. One can glean that the first cleared swaption was dealt between Barclays and perhaps RBS on April 11th, 2016.
As we would do at Clarus, we sat there watching SDRView to witness the first cleared swaption. Here is what SDRView typically shows for swaptions during the day, complete with a nice matrix of expiries and maturities:
Here is what we saw for the entire day when only filtering on Cleared swaptions:
SO WHAT HAPPENED TO THE CLEARED SWAPTION?
Before getting too upset, I gave it a couple days and kept checking SDRView. It is quite possible that the trade was reported incorrectly but later could be cancelled and replaced with the correct trade report. However 2 days later, still no cleared swaptions showing up for the 11th of April. Taking a longer historical view of swaptions, I look at all daily USD swaptions activity since March 1st:
This shows roughly 125 (bilateral) swaptions traded per day over the course of March and April 2016. But importantly, still no cleared swaption on Apr 11. It does however show a cleared swaption on Mar 30. Upon further inspection of that “cleared swaption” on March 30, it was indeed reported on that day historically. So we’d have to conclude that was a report done erroneously on Mar 30.
POSSIBLE EXPLANATIONS
It’s important to understand the workflow behind how a trade shows up on the public SDR as cleared:
- Trade is executed by two participants with intent to clear
- One of those trade parties OR the SEF (if applicable) reports the trade (call this an “alpha trade”) to the SDR. I assume this missing swaption trade was reported to DTCC SDR, but could be wrong (but I don’t see it on any SDR).
- The SDR (DTCC) takes that alpha trade and tells the public about it (on their website) as “cleared”. Even though the “cleared” flag really just means its intended to be cleared. Tools such as SDRView pick that trade up and make sense of it.
- The real trade, still technically bilateral, gets sent to the clearing house (CME in this case) via some mechanism. For swaptions I believe Markitwire is used to affirm the trade and send the message to CME, but there are also direct connections from SEFs into clearing houses.
- CME gets the trade, performs various checks on it (such as credit checks), and all things good, it clears it.
- Technically here, CME reports the two new swaptions (each leg facing CME) to their own SDR (at least they do for cleared swaps). Importantly, they go tell DTCC that the “alpha” trade that the DTCC has in their SDR has been cleared. This way, the CFTC or other agencies dont end up double or triple counting. Note here that there are now 3 trades:
- The Alpha trade at DTCC, which was told to the public as “cleared” but really “intended to clear”. “Part 43 data” for the lawyers out there.
- The Beta Trade and the Gamma Trade (two novated trades at CME). These trades never get disseminated to the public. This is “Part 45 data”.
If you followed that, great. If not – the jist is that we should still see the alpha trade as reported to the DTCC as cleared.
I suppose the irony here is, that with so much transparency, its clear that participants run the risk of having their trade found out – but really only because they insisted on naming themselves on a press release. Typically banks don’t shout so much when they do a trade.
So why is the trade not found on the SDR? The only explanation I can give is there was a simple mistake. Banks have been reporting swaptions as uncleared for the past 4 years, its probably hard-coded in some of their reporting tools, or perhaps some middleware issue.
I will note that the trade has shown up on the CME clearing statistics (a 50mm $ trade), which you can view for yourself on CCPView when that is updated every week.
So be careful out there – and keep your eyes open for a missing swaption who needs a home.