Different over-the-counter derivatives markets have adopted central clearing at different rates over recent years, with early movers such as credit and interest rate swaps broadly having reached a balance now between cleared and non-cleared products.

The first wave of cleared OTC markets was prompted by post-2008 banking crisis regulation that mandated some standardised swaps to be cleared through clearing houses to avoid some of the problems that occurred after the high-profile collapse of Lehman Brothers.

These regulations, such as Dodd-Frank in the US and the European Market Infrastructure Regulation (EMIR), have washed through the system now so those swaps that are well-suited to clearing are being cleared while the smaller share of uncleared products is likely going to stay that way.

This new equilibrium between cleared and uncleared products has been underlined by a report by Coalition Greenwich, a division of Crisil, which concluded that uncleared swaps still have an important role to play as end users such as corporates are prepared to pay the higher costs associated with these specialised, customised products.

Stephen Bruel, head of the Derivatives and FX practice on the Market Structure and Technology team at Coalition, and author of the report, said: “This becomes an asset class by asset class distinction. If you think about the rates market, for example, there has been for years clearing of the more liquid instruments so you come to a point where those instruments that are still uncleared are more difficult to clear from a liquidity perspective.”

Bruel said in rates there is chunk of products that are not suited to clearing because of their bespoke nature: “We have become stable at 75-80% on the rates side, which is a healthy number relative to where it was ten years ago. If you contrast that with some of the FX instruments, for example, you will see a more consistent increase but from a lower baseline.”

The global interest rate derivatives market cleared just over 75% of its products by notional in the first quarter of this year, which was slightly down from 79.8% at the same time last year.

Index credit derivatives cleared 83.1% by notional in the first quarter compared with 87.6% at the start of last year, the report said citing data from International Securities and Derivatives Association and the Depository Trust & Clearing Corporation.

While those markets that were faster to transition to clearing seem to have settled on an equilibrium, there is a new wave of regulation focused on bank capital that could add fresh impetus.

Bruel said: “First we started with EMIR and Dodd-Frank with a mandate to clear, then there was UMR (Uncleared Margin Rules) that makes holding uncleared instruments more expensive for the buy-side, and now we have FRTB (Fundamental Review of Trading Book) and Basel end-game that are also going to encourage firms to clear more instruments.”

The US version of the global Basel end-game regulations have hit the headlines recently with the largest US investment banks and their trade associations claiming this regulation will increase the cost of doing business for banks which could force them to exit clearing entirely, hurting competition.

Bruel said: “As we move through one regulatory driver, we move into the next one so there is no rest in terms of how you want to manage the level of clearing at your own institution because the macro environment will keep changing.”

He concluded: “If you’re a portfolio manager looking at your book, there are advantages and disadvantages to cleared versus uncleared and part of the calculation are all these regulations. They are important inputs as are collateral and interest rates. All of those are important inputs into the decision to clear.”

The Coalition Greenwich report, which was focused on the Buy-side’s views on derivatives clearing and based on interviews with 210 derivatives professionals, found that operational efficiency is a key driver for asset managers when thinking about swaps clearing.

Some 82% of respondents to the survey said increased operational efficiency was “very important” making that objective the most convincing for clearing OTC derivatives.

The report added: “For some, despite existing operational challenges in exchange-traded derivatives, the operational efficiency that may come from trading and clearing derivatives is an important incentive. For others, the transparency of bilaterally agreed margin calculations can feel more operationally efficient, keeping some trades OTC.”