While the energy market has been clearing customer trades in real-time, dealer-to-dealer interest rate swaps largely have been clearing at the end of each day. Rates market participants have not had the desire -- nor the capability -- to calculate counterparty exposures in real time or even in near real time.
But once the clearing mandate goes live in March, Derivatives Clearing Organizations (DCOs), Futures Commission Merchants (FCMs) and clearing brokers must be able to accept trades for clearing within just one minute of submission. The goal is to create a market in which clicking “execute” completes the trade entirely.
This faster clearing cycle will reduce counterparty credit exposure and lead to more efficient collateral and inventory management, freeing capital and lowering margin requirements. A more automated and real-time clearing workflow will allow the market to more accurately manage risk and, by doing so, better deploy capital.But the path to this environment will require a technology investment by swaps dealers, FCMs and the clearinghouses themselves.
While FCMs have experience managing the risk of futures, they have less experience managing the risk of swaps. The Commodities Futures Trading Commission (CFTC) wants to ensure that FCMs, which clear on behalf of customers, are subject to standards at least as stringent as those applicable to Swap Dealers (SDs) and Major Swap Participants (MSPs), which will clear for themselves. The good news is that FCMs will have flexibility in developing procedures that meet their needs. Clearing intermediation can be addressed either through simple numerical limits on order or position size, or through more complex, automated pre-trade and margin-based limits. They could include price limits that would reject orders that are too far away from the market, or limits on the number of orders that could be placed in a short time.