Analysis of trade activity data prior to and post the March 11th Dodd-Frank Act mandatory clearing deadline.

1. OTC Central Clearing: One Month In, What does the Data
Show? By Amir Khwaja
Amir Khwaja, CEO of Clarus Financial Technology, analyses trade activity data
prior to and post the March 11th Dodd-Frank Act mandatory clearing deadline.
Introduction
Now that we have almost one months of trading post March 11th, we have
sufficient data to perform a meaningful analysis of trading activity and look for
any changes, either expected or un-expected.
Our Data Source
A good analysis usually starts with a source of independent data and we now
have this for OTC Derivatives with the DTCC Derivatives Data Repository (DDR).
The analogy that springs to mind is the residential housing market in the UK,
where anyone can login in to a website and see the actual prices paid for houses
on any street in the last 10 years. Contrast this with the preceding situation,
when one had to rely solely on estate agents, brokers, word-of-mouth and gossip.
The OTC Derivatives market is currently in the process of a similar opening up.
From January 3, 2013, DTCC has made publically available the derivatives
trading activity data, which is required to be reported by US financial firms
under the Dodd-Frank Act.
Choosing our Periods
Using the Clarus DDR View we selected the following three periods to compare
trading activity.
 18-31 Jan 2013, as the first 10-day month-end period in the data.
 15-28 Feb 2013, as the last 10-day month-end period prior to Mar 11th.
 15-28 Mar 2013, as the first 10-day month-end period after Mar 11th.
Comparing the cumulative volume over 10-day periods isolates us from the
fluctuations observed in daily data, some of which is statistically low volume.
US Dollars Products
Lets look first at USD Dollars as the highest volume currency and the four
Interest Rate products where clearing is mandatory; Fixed-Float Swaps,
Overnight Index Swaps (OIS), Basis Swaps and Forward Rate Agreements (FRA).
A picture being worth a hundred words and a hundred times quicker to
understand, we will use charts followed by a few observations.

2. $300 USD Swaps 73%
$250 61%
55%
$200
Billions
Cleared
$150
Bi-lateral
$100
$50
$0
18-31 Jan 15-28 Feb 15-28 Mar
 The Cleared trade percentage in gross notional terms has increased
steadily in each of our 10-day periods from 55% to 61% to 73%.
 The increase in Cleared has come from a decrease in Bi-lateral trades.
 The total volume of vanilla fixed v float swaps has remained the same.
 There is still $100 billion over 10 days or $10 billion a day of Bi-lateral
Swaps being traded by firms required to report to DDR, which are not
currently required to clear or for firms with end-user exemptions.
$20 56%
USD OIS
$18 52% 62%
$16
$14
$12
Billions
Cleared
$10
Bi-lateral
$8
$6
$4
$2
$0
18-31 Jan 15-28 Feb 15-28 Mar
 Percentage of Cleared trades has increased from 56% to 62%.
 This is a result of the Bi-lateral trade volumes dropping from $15 billion
to $11billion, while Cleared trades volumes have remained at $19billion.
 Consequently total volumes for OIS Swaps are lower.
 There is still over $1 billion of Bi-lateral OIS Swaps being traded daily.

3. $30
USD Basis Swaps
$25 51%
$20
35%
Billions
Cleared
$15
28% Bi-lateral
$10
$5
$0
18-31 Jan 15-28 Feb 15-28 Mar
 Percentage of Cleared trades has increased from 35% to 51%, which
while a big increase, shows there is some way to go for this product.
 Cleared has increased and Bi-lateral decreased by similar amounts, so the
total volume is un-changed.
 There is still over $2 billion of Bi-lateral Basis Swaps being traded daily.
$450 USD FRA
$400 78% 76%
$350
$300 92%
Billions
$250 Cleared
$200 Bi-lateral
$150
$100
$50
$0
18-31 Jan 15-28 Feb 15-28 Mar
 Percentage of Cleared trades has increased from 78% to 92%, which is
the highest percentage of any of the mandatory cleared products.
 Bi-lateral volumes have decreased from $121 billion to $27 billion a huge
drop in this product.
 Cleared volumes have also dropped from $421 billion to $318 billion.
 So each category has dropped $100 billion or $10 billion a day.
 This is either a March quarter year-end effect or FRA trades are being
booked outside US entity reporting requirements or the FRA product is
seeing a significant fall-off in trading interest, presumably in favor of
Eurodollar Futures.

4. Are EUR, JPY, GBP any different?
Lets now look at whether the other three major currencies show similar trends.
In the interests of brevity, we will look only at a few key charts.
€ 140 EUR Swaps
€ 120 68%
€ 100 82%
73% Cleared
Billions
€ 80
Bi-lateral
€ 60
% Cleared
€ 40
€ 20
€0
18-31 Jan 15-28 Feb 15-28 Mar
 Percentage of Cleared has increased from 68% to 82%, similar to USD.
 The total volume had fluctuated down then up over our periods.
 Bi-lateral trades show a bigger reduction (60%) then Cleared.
 These effects may be due to US firms trading less EUR Swaps or the
ongoing European Sovereign Crises with Cyprus being the latest.
 There is still over €2 billion a day of Bi-lateral Swaps reported.
¥7,000 JPY Swaps
¥6,000 80% 84%
¥5,000
Cleared
Billions
¥4,000 76%
Bi-lateral
¥3,000
% Cleared
¥2,000
¥1,000
¥0
18-31 Jan 15-28 Feb 15-28 Mar
 Percentage of Cleared has not changed significantly.
 The total volume has fluctuated down in each period.
 Cleared trades show a bigger reduction then Bi-lateral.
 These effects may be due to March quarter year-end effects, which are
particularly important in Japan.

5. € 40 EUR OIS 77%
€ 35
€ 30 53%
€ 25
51%
Billions
Cleared
€ 20
Bi-lateral
€ 15
€ 10
€5
€0
18-31 Jan 15-28 Feb 15-28 Mar
 Percentage of Cleared trades has increased from 53% to 77%.
 Bi-lateral trades have dropped from €24b to €11b.
 Cleared trades have increased from €27b to €38b.
 So overall volumes have remained the same
 There is still over €1 billion of Bi-lateral OIS Swaps being traded daily.
£80
96%
GBP FRA
£70
97%
£60
£50
Billions
Cleared
£40
Bi-lateral
£30 98%
£20
£10
£0
18-31 Jan 15-28 Feb 15-28 Mar
 Percentage of Cleared trades has remained unchanged at 98%
 Cleared volumes have dropped a huge amount from £79b to £26b, which
echoes the USD trend (and the EUR FRA one).
 Cleared volumes have also dropped from £3.5b to £0.6b.
 This is either a March quarter year-end effect or FRA trades are being
booked outside US entity reporting requirements or the FRA product is
seeing a significant fall-off in trading interest, presumably in favor of
Eurodollar Futures.

6. Other Currencies
The analysis for these is best left to another article and possibly even until the
European Derivatives Repository is up and running.
However returning to our earlier maxim that a picture is worth a hundred
words, I will only include an illustrative screen-shot from our DDR View and a
few observations.
 Un-like the major currencies, none of these currencies show any real
increase in the trade count or gross notional of Cleared Swaps.
 Not surprising, as these are not yet mandatory for clearing under DFA.
 The cleared percentage remains low, significantly less than 50%.
 The total number of trades and volumes are low, probably because we
need the European and regional derivative repositories to be reporting
before we perform any meaningful analysis of these.
A final observation, currencies such as BRL, KRW, MXN & THB have significant
numbers of trades and gross notional in bi-lateral swaps. Surely some CCP needs
to start offering clearing for these and a regulator mandating clearing.
What, you need more time?
It only remains to ask, “where do we go from here?” In answer to which, we can
only say we need to wait and see what happens as the Dodd-Frank Act and EMIR
timeline advances and more deadlines are passed.
The next few interesting ones for the US are mid-April, when more legal entities
are required to report their trades to the DTCC, followed by June and September
when more legal entities are required to clear eligible derivatives.
For Europe, July and September for reporting of Interest Rates and Credit
Derivatives, January 2014 for other asset classes and sometime in early 2014 for
mandatory clearing.

7. What, you also need more data?
The need to get more data to improve our analysis is particularly important as
the largest chunk of the Swap market is traded in London.
One only has to look at LCH SwapClear volumes to get a sense of how much
global trading activity is not in the DDR data files.
On Apr 4, 2013, comparing SwapClear daily cleared product volumes with those
from DDR View , we can see the following.
$300
SwapClear & DDR
$250
$200
Billions
SwapClear
$150
DDR
$100
23% 35%
$50
4% 6%
$0
USD IRS USD OIS USD Basis USD FRA
 So 23% or about a quarter of global USD Cleared Swaps are traded by US
legal entities required to report to DDR.
 This sounds reasonable as the US market is generally thought to
represent 30-35% of the Swap market, with Europe around 50-55%.
 Percentages for USD OIS and Basis swaps are surprisingly low.
 Percentages for EUR, GBP & JPY products are much lower (<5%), which
is, as we would expect given the home markets are Europe or Japan.
Summary
In summary we can say that one month after the first mandatory clearing date,
we can see both expected and un-expected changes.
So Cleared trades are up as a percentage of total volume, with the major
currencies and most products showing a drop in bi-lateral volumes directly
reflected in an increase in cleared volumes.
The FRA product in each major currency has suffered a significant drop in
trade volumes (both cleared and bi-lateral) and it may be this is a year-end
effect or that trade booking has moved outside the US or trading has migrated

8. to the Euro Dollar Futures market (for which we need to look for evidence in
Exchanges contract volumes).
JPY Swaps volumes have dropped significantly, which we assume is a year-end
effect, so need to wait for the April figures.
Currencies other than USD, EUR, JPY, GBP show no change in percentage of
Cleared trades; not surprising when you consider that these are not currently
mandatory for clearing under DFA.
There is significant bi-lateral activity and no clearing in the Latin American
currencies BRL and MXN, as well as the Asian currencies KRW and THB.
As further deadlines come and go, particularly the European reporting
requirements in 3Q 2013, we need to re-analyse the data to see which trends
continue and which do not, which are global and which US specific and which of
our observations hold and which do not.
After all as we all know, but find hard to put into practice, it is only by
continually challenging our beliefs in the light of new facts that we develop and
increase our understanding of the world around us.