Risk South Africa Conference, October 2018
DeriviDoc Founder and Director, Melissa van der Merwe, attended the Risk South Africa (RiskSA) conference in Cape Town in October last year and found the panel discussion on central clearing of particular interest. Read her summary of the discussion below.
RiskSA conference – Cape Town, Oct 2018
Summary notes from a panel discussion with
Garth Klintworth (Head of Markets, Barclays Africa Group)
Sean Quinlan (Head of Clearing Broker Relationship Management EMEA and APAC, LCH)
Paul du Preez (Senior Risk Manager, JSE)
Barclays have been clearing a limited scope of products (London Clearing House or LCH). This is because the liquidity coverage ratio and Basle III liquidity ratios are vastly reduced by clearing. Once the major regime for clearing has been implemented, it is likely you will see a large increase in the amount of cleared transactions (because transactions that are cleared will be cheaper and less burdensome on the liquidity ratios e.g. inflation-linked swaps are not required by regulation to be cleared and yet they are being cleared by LCH due to the lower pricing of clearing this product).
ZAR forward rate agreements are not a clearable product, but these are now being considered important and possible to clear going forward.
LCH do clear ZAR IR swaps (and have done for the past eleven years).
JSE currently operate as the clearing house for exchange-traded products, but they do not offer clearing for any OTC products as yet.
JSE has to move OTC clearing to an independent platform, and so JSE Clear has been established as an independent branch from exchange-traded clearing. JSE Clear plan to evolve to clear ZAR IRS, repo and equities.
JSE plan to leverage their exchange-traded clearing platform in order to offer OTC clearing to the SA market. It is unlikely a SA bank would become a Direct Clearing Member (CM) of LCH, because then the local bank would be required to underwrite all the risk positions at LCH (meaning it would be too expensive and risky for a local SA bank to do so). As a result it is considered better for a local bank to be a client of an LCH CM, which will reduce the costs for the SA bank, as they then do not have to underwrite the cost of LCH risk, but rather just have to pay the CM a fee. LCH has no plans at this stage to set up a local clearing house in SA as they have concerns that the insolvency laws as they currently stand in SA won’t allow LCH to enforce their priority claim against an insolvent party in terms of their rule book. The SA Insolvency Act is being amended to ensure that this enforcement right is not an issue.
Currently SA banks who are clearing products through LCH have to post USD collateral and therefore have to price ZAR products with $ leg of the transaction, making it a lot more expensive than clearing through JSE Clear, for example. LCH can accept other less liquid assets as collateral (e.g. ZAR), but have the right to haircut this. At present LCH will only consider ZAR cash (with haircut), but they are working towards accepting ZAR Government Bonds.