- We take a look at the total size of uncleared derivative markets.
- FX Options are the largest Uncleared market, followed by Swaptions and NDFs.
- Cross Currency swaps are the fourth largest uncleared market.
- Around $5.5trn each month trades uncleared – almost equivalent to the US market for cleared IRS.
Uncleared Markets
The death of uncleared trading has been somewhat over-reported. We are certainly guilty of it ourselves on this blog, with a natural focus on Clearing. From a data perspective, transparency is certainly better for Cleared volumes because we can access volume data directly from the CCPs themselves – see CCPView.
However, as I explored the SDR data recently, I realised that we still have a vast treasure trove of data that we largely ignore. So here is a quick run-down of the areas of the market that remain uncleared.
Interest Rate Derivatives
Vanilla IRS
In Rates, almost all OIS and vanilla IRS across most of the 42 currencies are now reported as cleared:
- USD notional equivalent of all 42 currency IRS reported to US SDRs for the past two years.
- Don’t forget how big this market is – over $6.5trn are reported in Fixed-Float IRS every month!
- Between 4-6% of volumes are left uncleared each month.
- That means a total notional of around $250bn per month is still uncleared.
Vanilla OIS
OIS clearing was probably not as mature as IRS clearing before the advent of the Uncleared Margin Rules. However, from a slow start we saw a big move to clearing. How much now remains uncleared?
- Another huge market in notional terms. Over $5.5trn is reported across 27 currencies in some months.
- Between 2-5% in 2018 has been uncleared per month. On average, clearing rates are now higher (marginally) than in IRS!
- That means a notional of $150bn per month is left uncleared.
So we have a running total of $400bn per month in vanilla products that remains uncleared (at the point of trade reporting). That’s a big market!
Basis
Sticking with vanilla products, let’s take a look at single currency basis swaps.
- As we saw last week, volumes have really been ramping up in Basis trading in 2018.
- In terms of broader markets, Basis is a smaller market though, with monthly volumes rarely troubling $1trn.
- Between 2-4% of volumes each month remain uncleared.
- That means a notional of $25bn per month is left uncleared.
Our running total of uncleared volumes now stands at $425bn – and that is just for (broadly) clearable products!
Inflation
Now we start looking into products that are not necessarily eligible for clearing. They certainly don’t have any clearing mandates!
- This is a much smaller market. I hadn’t really appreciated how much smaller. Just $75bn per month tends to be reported to SDRs.
- Of this, around 18% remains uncleared each month.
- That means a notional of $12.5bn each month. It’s getting smaller, but it still moves the needle (just).
Our running total hits $437.5bn…
Cross Currency Swaps
Of course, I had to mention Cross Currency! I like to think of it as the “largest uncleared market in the world” (excluding FX spot and forwards). Am I right?
- Well it’s certainly all uncleared! We see only $650m reported as cleared in the past two years – maybe at HKEX?
- Across 46 currency pairs, up to $720bn has traded per month. This includes Basis, Fixed-Float and Fixed-Fixed structures.
- Average monthly volumes are somewhat lower than this at $500bn.
Rounding up, let’s say that Cross Currency Swaps take us to a nice round $1trn per month of uncleared volumes. Wow. And Cross Currency makes up over half of that total.
What else could compete?
Options
A market where volumes have been increasing recently….
- Oh man! So much for Cross Currency being the largest uncleared market in the world!
- Swaptions alone regularly trade over $1trn per month of notional. And all of it is uncleared.
- Add in Caps/Floors for another $125bn per month.
- And Exotics register even more at $400bn per month.
- Total uncleared options flow is therefore $1.5trn per month.
A new running total of $2.5trn per month!
Okay, so LCH SwapClear just announced that they cleared $1,000trn ($1 Quadrillion) this year, but I still don’t think a market of $2.5trn per month should be sniffed at – or forgotten about!
FX
FX Options
Secondly, we should also consider other asset classes. Whilst we know that physical FX remains uncleared, we have seen a sizeable shift toward clearing in NDFs. However, FX Options remain uncleared. How big is this market as reported by US Persons to SDRs?
Showing;
- Monthly volumes of vanilla FX Options are around $1.5trn.
- This is all, currently, uncleared.
- Barrier options would add a further $30bn to that toal.
So across Rates and FX we are now at a monthly total of $4.0trn per month! Plus one more significant volume maker…
NDFs
I found the below total volumes surprising. Although I did have to select 380 currency pairs to get the data!
Showing;
- NDF volumes as reported to the SDRs – they tend to all be reported as uncleared, and are novated to clearing post-trade.
- Calibrating versus the cleared data, we find that there remains an Uncleared amount of $1.2trn per month.
- Add in NDOs (non deliverable options) and we find another $200bn per month in uncleared volumes.
Rounding up, I therefore make our running total $5.5trn per month in uncleared Rates and FX products.
In Summary
The ESRB recently looked at Trade Repository data. They performed a very high level analysis of the data, and found that only around 50% of all Interest Rate derivatives were cleared in Europe. That is a good headline to lead with, but I do think it is performed at too high a level.
Nonetheless, I have repeated their same analysis but for US data:
- Uncleared volumes of Rates derivatives per month are about $2.5trn per month for US Persons.
- Uncleared volumes of FX derivatives per month are about $3trn per month.
- 18% of Rates derivatives remain uncleared in the US market.
- 80% of FX derivatives remain uncleared.