Credit-default swaps traders are clearing a growing portion of contracts through central clearinghouses as the total market shrinks, according to the Bank for International Settlements.
The share of outstanding contracts traded through clearinghouses rose to 34 percent at the end of December from 31 percent at the end of June and less than 10 percent in 2010, BIS said in a report published on Wednesday.
Clearing has avoided the worst of a decline in swaps trading as dealers seek to curb risks in the financial system and avoid higher capital charges imposed on bilateral transactions with clients. Investors are also voluntarily clearing some contracts tied to individual companies and countries to boost liquidity.
The notional amount of cleared trades fell 7 percent to $4.2 trillion in the second half of last year, compared with a market decline of 20 percent to $12 trillion, said BIS, which was formed in 1930 and acts as a central bank for the world’s monetary authorities. The overall reduction reflects a $1 trillion decline in inter-dealer activity to $5.5 trillion, it said.
Central counterparties processed 42 percent of multi-name contracts, which are easier to clear because they’re more standardized, and 28 percent of single-name swaps as of Dec. 31, BIS said. Separately, the trend toward netting, when traders cancel overlapping contracts, may have stalled, according to the report.