In the first of a four part series to be published this week, Daniel Maguire, the Group Head of Post Trade at London Stock Exchange Group and Chief Executive Officer of LCH Group, talks to Luke Jeffs about the firm's uncleared derivatives strategy

The LSE Group is now unrecogniseable from the firm that David Schwimmer took over in 2018, largely due to the $27bn (£21.6bn) acquisition of Refinitiv in early 2021. While much of the British group’s efforts in the past two years have focused on digesting the vast data firm, a quieter success story has been the performance of LSEG’s post-trade business, led by Daniel Maguire.

This was underlined in the LSE Group’s first quarter 2023 financial results on April 27 when post-trade was the fastest growing of any LSEG business, up 21.4% to £289m.

Schwimmer said about those results: “In Post Trade, our leading franchise attracted a surge in volumes as clients looked to manage risk effectively during a period of heightened volatility.”

The LSEG chief is right that clearing houses tend to do well in periods of heightened activity, given they charge fees on individual trades, but Schwimmer equally knows the success of the post-trade business is largely attributable to a carefully crafted multi-year strategy to develop that business.

Most recently, the LSEG post-trade arm has been exploring the murkier end of the vast over-the-counter (OTC) derivatives market by building out its services for uncleared swaps.

Uncleared OTC Derivatives

Speaking to Global Investor in late April, Maguire, the Group Head of Post Trade at London Stock Exchange Group and Chief Executive Officer of LCH Group, explained the rationale.  

“If you go back to 2009, post the global financial crisis (GFC), G20 leaders wanted banks to collateralise their OTC derivatives, mandating the clearing of the more standardised derivatives contracts through central counterparties (CCPs), and they also introduced higher capital requirements and minimum margining requirements for uncleared OTC derivatives.”

Maguire added: “Whilst sizable, the cleared space was straightforward - across G20 nations, certain types of institutions doing certain sizes and types of trades were mandated to clear and there was then a natural evolution by market participants, beyond the original mandates, to clear non-mandated trades too.”

Once the authorities had tackled the larger, standardised market, it was inevitable they would turn their attention to the smaller and more complex business of complex swaps with the Uncleared Margin Rules, the implementation of which was completed in September last year.

“As a firm, we have historically focused on clearing but we recognised five or six years ago that centralised clearing for OTC derivatives isn’t always the answer.

“So, we started thinking how to bring our infrastructure and expertise to address the more idiosyncratic and esoteric uncleared products that are going to be subject to margin rules. That was when SwapAgent was born.”

LCH SwapAgent, launched in 2017 with the backing of 14 of the world’s top investment banks, offers a rulebook, standardised and transparent Credit Support Annex (CSA), valuations and calculations of risk numbers.

This sounds very “clearing-like”, Maguire suggests, but importantly, SwapAgent is not acting as CCP in the case of a default. “It is a clearing house but not a CCP,” he said.

Maguire continued: “Going back to the regulatory environment, we had Dodd-Frank, the European Markets Infrastructure Regulation (EMIR) and UMR but the other big vector was the Basel III capital rules. If you don’t get caught by the collateralisation, you may well get caught by the capital side of things, or perhaps both. Whichever way you look at it, post-GFC there has been a combination of rules, regulations and capital requirements that have made OTC derivatives safer but also more expensive.”

“We came to the realisation that this uncleared space will persist and needs to thrive, and whilst there are a lot of good niche businesses in the space making parts of the process more efficient, every time we talked to our customers, whether sell- or buy-side, it was clear that this is a pain point, and a more holistic solution would be preferable. Whenever we speak to one of the investment banks or their buy-side clients they ask: “How can you make this whole process more efficient, like clearing?”

Using SwapAgent as the platform, the clearing provider set about building out its services in this historically underserved market and, rather uncharacteristically for LCH, sought to turbocharge its progress through acquisitions.

Maguire said: “Quantile has a capital, XVA and resource management background and they have had a lot of success connecting to the major dealers to offer compression and optimisation in different flavours, bringing to bear their technology and expertise to really harvest portfolios and make them less capital and collateral intensive and more risk efficient.

“In clearing we always have been open access and have worked, and continue to work, with other optimisation providers as well as Quantile, but we came to the view that this skillset and capability is becoming more core to our overall mission, and we felt the need to have this additional capital and optimisation expertise in-house.”

Maguire said Quantile, which the LSE Group acquired late last year in a deal worth about £270m, can channel trades into the clearing house and SwapAgent through its optimisation services and, once the trades are in the clearing house, the client has a high integrity, self-reinforcing database of cleared trades.

“Quantile operates both in the uncleared and cleared space across multiple asset classes and hopefully, as we get more traction with SwapAgent and a resultant high integrity database of uncleared trades, we will be able to harvest, both within, and across, cleared and uncleared to help customers optimise their funding, capital and collateral and enhance risk management.”

More recently, in early April, LSEG also acquired US margin processing firm Acadia without disclosing terms.

Maguire said: “Acadia is a fundamentally important piece of the jigsaw. Customers are looking for more ways to optimise their financial resources, and Acadia’s services enable significant efficiencies in risk management, margining and collateral. It connects the sell- and buy-side across various asset classes – rates, credit, FX and equity and we intend to cover the same asset classes with SwapAgent too.”

He added: “Both Quantile and Acadia are businesses that are connected to customers now, they are real. There are a lot of great ideas out there, but people only have a certain amount of bandwidth and capital to spend on connectivity and the like, so we put a high importance on businesses that are connected, credible, and already tangibly delivering value to customers.”

To be continued on May 16