In the process of clearing swaps, the clearing house becomes the
central counterparty to, and has responsibility for, the corresponding
trade obligations arising from each half of the original bilaterally
negotiated trade. This principle is known as registration and is
the same role that was explained earlier in respect of the clearing
of exchange-traded derivatives.
SwapClear offers the interbank swap market a facility that aims to
free up credit lines, reduce risk and use of capital, thus increasing
return on investment and trading opportunities.
The extent of these benefits will depend on the individual bank,
but are likely to include:
• Lower counterparty risk
• Lower operational risk
• Reduced credit line utilisation
• Reduced regulatory capital requirements
• More secure and standardised collateral handling procedures
• Standardised processing of swaps, simplifying documentation and
operations, enabling back offices to handle higher volumes at
lower cost
• Fewer payments.
Benefits of netting
The major benefit provided to banks by SwapClear is the ability to
net several counterparty swap books multilaterally into a single
account with the clearing house, which becomes the counterparty to
every trade registered with SwapClear. As a result, current bilateral
netting arrangements are replaced with more efficient multilateral
netting. It has been estimated that the effect of multilateral netting
can reduce exposures by up to 90 per cent when compared to bilat-
eral netting.
Multilateral netting is at the heart of central clearing and delivers
the greatest benefit in terms of reduced credit risk, significantly
beyond that available from bilateral netting and collateralisation.
In addition, credit risk is reduced through the use of VM. Daily
margining effectively reduces the risk horizon to a single trading day,
with the result that banks are no longer concerned with the prob-
ability of default over the life of a swap book, but only over the next
business day. Portfolio analysis has indicated that SwapClear reduces
60–80 per cent of current exposures for mixed swap portfolios, i.e.
where a proportion of swaps are non-clearable.
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