Sup homies! In a meeting today I heard the phrases cleared swap and uncleared swap. Probably a rookie question, but does anyone know the difference?
Thanks
-B
Apparently the former involves a clearinghouse (i.e., it’s traded on an exchange) while the latter does not (i.e., it’s traded OTC).
Dodd frank, emir?
Yes. Thanks to Dodd Frank, Eligible Swaps must be cleared. (Basically everything these days is elligible)
They are not traded on an exchange, they are still in essence OTC (You can customize start/end states, roll periods, fixing dates, etc…), but now instead of facing off against a Dealer, both sides face off against a clearing house (LCH, CME…etc) with offsetting transactions.
So, If I want to pay fixed on a 10y SBvs3B with Dealer X, I would send my details down to the CCP, and Dealer X would do the same (Dealer would Rec Fixed on 10y SBvs3B). Once everything matches the trade is cleared, and in all legality I am facing the CCP. (I am leaving out a lot of steps). We now post IM to the CCP, pay/rec coupons from the CCP, and get MtM from the CCP (which are usually terrible)
Bilateral swaps (uncleared), the Dealer would send their details directy to us to affirm. We pay IM to the Dealer, pay/rec coupons to the dealer, and get MTM from the dealer.
To go a step further, the latest mandate is SEF (Swap execution facility) trading. This is more of an “exchange” model where dealers post quotes and you execute electronically. Not all swaps are mandated SEF eligible, but the market is going here. Basically this space is really vanilla stuff, i.e. spot starting fixed tenors. (3y, 5yr, 10yr, 30yr)