As the industry prepares to shift towards a new era of derivatives trading, State Street Global Exchange, part of State Street Corporation, with $22 trillion in assets as of Sept 30, 2013, announced today that it will use LCH.Clearnet’s SwapClear service to clear OTC interest rate swaps and thereby expand its existing end-to-end derivatives solution: the DerivOne clearing platform.
This follows after State Street received provisional approval in late September by the CFTC for its Swap Execution Facility (SEF) application under the name SwapEx – a platform for interest rate and FX derivatives – which began trading on October 8, 2013, according to the company’s announcement.
The membership taken by State Street Exchange provides broad access to a wide range of clearing capabilities via SwapClear which regularly clears in excess of $1 trillion notional per day and over 95%of the entire interest rate swap market, according to information on the SwapClear website, and as per the press release from State Street today.
Trillion Dollar Mark and Expansion
Forex Magnates had previously covered the $1 trillion milestone reached on LCH.Clearnet’s ForexClear product earlier in August 2013. LCH.Clearnet is largely owned by the London Stock Exchange (LSE) as of earlier in the year when the LSE further increased its stake in the clearing firms business to that of a majority position. The end-user clients who stand to benefit from the addition of SwapClear to the clearing side of State Street derivatives business, will be professional users of the DerivOne platform which covers:
- Collateral management
- Risk and analytics
The execution and clearing services for listed derivatives across all major markets are handled through State Street’s affiliates including State Street Global Markets, LLC (which is a CFTC registered FCM and NFA member) and State Street Bank GmbH, London Branch. In addition, as a Global Systemically Important Financial Institution (G-SIFI), State Street is well-capitalized with nearly $22 trillion in custody through custodial services from State Street Bank and Trust Company and its subsidiaries, and over $2 trillion in assets under management as of September 30, 2013, according to a description on its corporate website.
Preparations Through a Regulatory Pivot
Commenting in the press release today, Martine Bond, head of trading and clearing at State Street Global Exchange said, “Our SwapClear membership gives our global client base access to the world’s largest clearing house for interest rate swaps with deep liquidity pools and superior risk management.”
Ms. Bond also emphasized in the release a new shift regarding regulations: “As an entire industry aligns itself with the new regulatory environment, having comprehensive clearing and servicing solutions ensures that our clients are efficient across the entire derivatives trade lifecycle.”
Just a few weeks ago Forex Magnates covered a report from the Bank of International Settlement (BIS) on the macroeconomic assessment of OTC derivatives regulatory reforms, and the impact that these are likely to have on the structure of the industry and its participants.
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Daniel Maguire, head of SwapClear US at LCH.Clearnet added to the company statement regarding the new membership, “State Street is an important addition to SwapClear’s global membership roster.”
“Buy-side clients will benefit from the addition of a global industry leader to an already strong pool of direct clearing members and liquidity providers,” concluded Mr. Maguire.
OTC Forex and Derivatives
With regards to its FX business, State Street Global Markets operates the StreetFX platform and eXCHANGE division and is part of State Street Corporation – which wholly owns Currenex Inc., a widely used provider of professional foreign exchange solutions to the buy-side industry.
Among other FX related services, the company operates a Foreign Exchange Research Strategy that analyzes order-flows and uses a proprietary investor behavior research model which models the flows of portfolios representing 15% of the world’s investable assets. This is only one example of the broad investment approach the company applies according to a strategy report on the company’s website.
When combined with the quantitative throughput of a 40-member research team and the vast data that the company has access to, one can believe that a similar approach to predicting short term deviations may be used by firms across its other asset classes, such as OTC interest rates and FX instruments and along with a long term approach using fundamental analysis. The above mentioned report stated, “When an intermediate cycle lines up with the longer-term macro fundamental trends, the opportunity for making money is at its greatest.”
Contemporaneous Regulatory and Market Challenges
Forex Magnates had covered recent statements from the company with regards to the readiness of OTC market buy-side participants in the new SEF segment. In addition, recent comments from the CFTC point to the regulators own unreadiness as per quotes made by one of the agency’s Commissioners last week and published on the CFTC website.
The announcement today also followed the news two days earlier from LCH.Clearnet of the appointment of Suneel Bakhshi, as the new group chief executive officer (CEO) effective at the beginning of 2014 (at the start of Q1), who will replace Ian Axe the current CEO. This follows after Mr. Axe announced his wish to step down earlier this year.