Germany’s sovereign debt agency will begin clearing its over-the-counter interest rate swaps through EurexOTC Clear in the fourth quarter, after confirming that it has become a clearing member of the platform.
The move by Finanzagentur comes ahead of new derivatives market reforms under the European Markets Infrastructure Regulation that will require swaps dealers to clear all standardised OTC derivatives through central counterparties from next April.
Germany’s federal government has €280bn nominal of bilateral swaps outstanding, which it uses to optimise interest rate structure and limit interest rate risks.
Despite being some of the largest end users of interest rate swaps, sovereign issuers are exempt from the clearing obligation. The agency, however, believes that clearinghouse membership offers a range of benefits over bilateral settlement such as the efficient exchange of collateral backing trades.
Such benefits are likely to become an increasingly important driver of voluntary clearing for end users as new rules set to go live next September require all counterparties to exchange initial and variation margin on their OTC derivatives exposures – a huge operational shift for most derivatives users.
“The Bund will take advantage of the highest possible market depth and liquidity that a clearing service offers as well as the reduction of operational risks during the settlement process for its interest rate swap transactions,” said Tammo Diemer and Carsten Lehr, co-CEOs of the Finanzagentur in a written statement.
The agency will clear all newly transacted swaps later this year and will transfer the existing portfolio on a gradual basis. Bilateral swaps outstanding are currently transacted with around 12 counterparties, predominantly participants from issuer’s Bund Auction Group.
Germany’s move could prove crucial in encouraging other government issuers into the cleared derivatives world. Sweden’s national debt office began clearing Swedish krona interest rate swaps through Nasdaq OMX in 2010 as part of a pilot scheme for the service, but others have been slow to follow – until now.
For many non-financial issuers, default fund contributions that are used to mutualise losses stemming from member defaults represent a stumbling block to clearinghouse membership. According to officials at Eurex, Germany’s finance agency is not subject to any special rules and all Eurex clearing terms and conditions are valid.
The agreement will provide a boost to EurexOTC Clear, which has cleared notional value of €184bn in OTC interest rate swaps so far this year. By volume, it still remains a long way behind LCH.Clearnet, which has cleared total notional of US$351trn across all interest rate derivatives through its SwapClear service so far this year, including US$115trn in standard interest rate swaps.
