Cleared OTC Swaps Are Now Standardised?
ISDA has published a paper illustrating the wide variety of terms in cleared IRS. ISDA suggest that there may be a perception that by mandating clearing for OTC products they have become 'standard' rather than their variable nature in the wild. Those of us on the inside of the market know this not to be the case, but just to prove a point, ISDA and DTCC have assembled the data to show how variable cleared OTC IRS can be.
One of the benefits of an OTC swap is the ability to customise the terms to respond to a business need – such as transferring risk from bond issuance or loans where the dates and terms have no resemblance to the futures market.
The data in the study comes from the DTCC GTR using US data only, but given these swaps end up in global CCPs are a reasonable proxy for the global IRS market.
The ISDA introduction
As policymakers in emerging and frontier markets consider the regulatory framework for financial markets in their jurisdictions, the need for customized risk management tools by market participants remains important.
Market participants use over-the-counter (OTC) derivatives because they are able to customize the terms of their contracts to align more precisely with their specific hedging needs.
With the expansion of central clearing for OTC derivatives, there is a perception that cleared IRD transactions have become standardized, like interest rate futures.
Using data from the Depository Trust & Clearing Corporation, this paper examines the population of cleared fixed-for-floating IRS and demonstrates that cleared products remain highly customizable as compared to futures contracts, enabling buyers and sellers to agree on bespoke terms to better manage the risks to which they are exposed in the normal course of their business operations.
View the report on the ISDA website here