Using the SwapClear Client Clearing Service to meet current challenges in the interest rate swaps market

Abstract

The financial crisis has forced regulators to focus their attention on over-the-counter (OTC) derivatives in order to increase transparency in negotiations and reduce systemic risk. One of the key reforms being proposed is the principle of compulsory centralisation of standardised interest rate swaps (IRS) through clearing houses. The aim of this paper is to explain how a possible answer to the aforementioned development could be given, showing the MPS Capital Services business case. There will be a practical description of the application to the SwapClear Client Clearing Service (offered by the London Clearing House (LCH)) made by MPS Capital Services. After a brief description of the service, the benefits of clearing and the reasons for joining LCH are explained, and some highlights of developed activities and timings are presented, focusing on some of the details of the key operational, legal and contractual aspects. Finally, the determining factors in MPS Capital Services choice of the primary and back-up clearing members will be shown and some of the open issues that the size of the project necessarily involves. As far as future scenarios are concerned, MPS Capital Services believes that the OTC derivatives market will move towards greater segmentation, in which all players in a position to adhere to clearing facilities will do so, thereby gaining access to the professional market, by joining one or more Swap Execution Facilities (SEFs) as a swap dealer.