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Global OTC derivatives market reforms in particular have forced the CCP world into an unprecedented period of change. A number of new and existing CCPs have stepped up to clear OTC contracts. This had led to consolidation and a powerful breed of multi-asset class CCPs in some parts of the world, while other markets are have leaned towards fragmentation and the creation of new clearing entities.
Clearing is and always will be a volume game. For that reason it’s been no surprise to see a rise of M&A activity in the sector. Those with the largest global footprint and the broadest asset class coverage look increasingly likely to dominate thanks to efficiency gains and high volumes.
However, given the number of domestic and regional players planning to establish and operate their own OTC derivatives clearing operations, the fragmentation route appears to have its own merits. One important benefit is that counterparty risk is diversified; hence there is lower probability that one single CCP can pose significant systemic risk to the entire market.
Going forward, the picture appears to show an ongoing cycle of fragmentation and consolidation for CCPs, with the long-term future of new and current houses determined by their ability to grab significant enough market share to warrant continued operation.
“Incumbents are unlikely to disappear, and CCPs offering multi-asset clearing will dominate,” says Will Woodward, research associate in Institutional Securities & Investments at Aite Group, which has just released a new report on OTC derivatives clearing. The study, entitled 'OTC Derivatives Clearing in 2014', gathered data in this year’s first quarter from the clearinghouses and CCPs that currently clear over-the-counter derivatives transactions across the globe and those that have announced they are planning to set up such operations in the next two or three years. Overall, the report predicts that dominant market players such as LCH.Clearnet and ICE Clear are unlikely to disappear from the scene, even if new entrants are able to gain some traction.
In addition, Aite Group expects more from regulators on minimum risk requirements for CCPs. “We also expect to see more from regulators on minimum risk requirements for CCPs. Regulators will continue to focus on ensuring that CCPs meet minimum requirements for risk management and margining as part of their crackdown on systemic risk", says Virginie O’Shea, senior analyst in Institutional Securities & Investments at Aite Group.