Transcript IMA Clearing House day - Investment Management Association

LCH.Clearnet: IMA Clearing House day
12th November 2013
Philip Whitehurst: Director. Product Management, SwapClear
Contents
1.
2.
3.
4.
5.
6.
7.
8.
2
Application for EMIR Authorisation
Product Scope
Customer Protection Offerings
Margin and Collateral
Default Rules and Procedures
CCP Investment Policy
CCO governance and Capital
Disclosure
Private & Confidential
EMIR Authorisation
•EMIR required all CCPs to submit for reauthorisation on or
before 15th September 2013
•LCH.Clearnet has fulfilled this requirement and is currently
awaiting feedback on the next steps
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Scope of Clearing Services
4
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The Markets We Serve
5
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OTC Derivatives Clearing: IRS
SwapClear Scope
•
•
•
•
Widest range of OTC IRS
eligible for clearing
All ISDA day count fractions
and business day
conventions
Continuous extension of our
IRS product range
Non-linear structures in the
pipeline (e.g. Inflation
swaps* and swaptions*)
*Subject to regulatory approval
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OTC Derivatives Clearing: FX & CDS
ForexClear
Products accepted
Non-deliverable forward foreign exchange contracts
Currencies accepted
Vs, USD
LATAM: BRL, CLP, COP
ASIAN: CNY, IDR, KRW, MYR, PHP, TWD
EMEA: RUB
Tenor range accepted
Spot-next to 2 years
Future service enhancements

Additional NDF currencies (PEN, ARS)

Additional foreign exchange derivative products (NDF-crosses, NDOs, FXOs, Forwards and Swaps*
CDSClear
Products accepted
iTraxx Europe: Main, Hi-vol and Crossover
Tenor range accepted
Series 5 onwards: 3,5,7 and 10 year tenors
Future service enhancements

Single name clearing*
*Subject to regulatory approval
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Customer Protection Offerings
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Customer Protection Account Offerings- SwapClear
Least Protection
Type of Account
Name of Account
EMIR Grading
9
Most Protection
Value Segregated accounts
ValueOmni
Omnibus
Segregated
Account
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ValueSeg
Individual
Segregated
Account
Asset Segregated Accounts
AssetOmni
Omnibus
Segregated
Account
AssetSeg
Individual
Segregated
Account
CustodialSeg
Individual
Segregated
Account
In
development
and subject to
regulatory
approval
Trade Submission: T2 Model
T2 Model
1.Trade Execution, Allocation & Affirmation
CP 1 and CP 2 agree to a transaction on the
SEF/affirmation platform:
Affirmation Platform
CP1
2. Eligibility Check
Once the matched and allocated trade is received by
LCH.Clearnet, an eligibility check is performed to validate
the Product, Participant and Fee Settlement .
3. Clearing Broker Risk Assessment
If trade passes eligibility checks, LCH.Clearnet sends
the trade and allocation details assigned to each CB by
the Client for CB acceptance.
4. Once CB acceptance has occurred, LCH.Clearnet has
60 seconds in which to accept or reject the trade
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CP2
1
2
CP1
Clearing
Broker
3
3
LCH.Clearnet
CP2
Clearing
Broker
Real Time Trade Registration - SwapClear
7:30
RTTR Opens
13:15
8:20
2nd Price Snap
1st Price Snap
19:05
Intra-day
Processes
3rd Price Snap
00:00
RTTR closes
LDN
NYC
20:00
16:15
EOD
Processes
12:00
9:00
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NA Curve Snap
EMEA Curve Snap
APAC CurveSnap
Deadline for CM to agree irrevocably to pay EOD margin call
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00:30
00:07
EOD Margin Run
Netting Cycle
Margin and Collateral
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Initial & Variation Margin Overview
• LCH.Clearnet uses the Portfolio Approach to Interest Rate Scenarios (PAIRS) VaR
methodology as the primary model for SwapClear Initial Margin, Adapted SPAN® for
CDSClear and FXPAR for ForexClear
Initial Margin
• The PAIRS calculation is based on filtered historical simulations. All positions in each
currency are re-valued under a series of cross portfolio yield curve scenarios to estimate the
highest forecast loss and therefore the Initial Margin requirement.
• Initial Margin is designed to cover expected shortfall based on historical scenarios from the
past 10 years.
• Initial Margin represents the amount required to close out a full portfolio without loss.
• Based on a 5-day holding period for members (the period required for close out in the event
of a default), scaled to 7 days for clients to include porting.
Variation
Margin
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•
•
•
•
Represents the market-to-market (unrealised profit or loss) of the portfolio
Net Present Value derived intraday; based on market standard valuation techniques
Currency portfolios revalued according to the yield curve
Variation Margin charged/paid out in the currency of obligation for SwapClear, USD for
ForexClear and EUR for CDSClear
• Price Alignment Interest (PAI) applied/charged to Variation Margin Balance
• Benchmark rate in currency of payable/receivable
Private & Confidential
LCH.Clearnet Ltd Collateral Options
Collateral for Initial Margin
• CASH: Sterling, Euros, US Dollars
• Australian Dollars to come in 2014*
• Additionally in limited amounts; Canadian Dollars,
Swiss Francs, Japanese Yen, Swedish Krona, Danish
Krone and Norwegian Kroner in accepted limits
Collateral for Variation Margin (SwapClear)
• CASH: SwapClear: In the local currency of the trade
• Client deposit rate is applied to cash posted to cover clientdriven margin requirements. Currently:
USD = Fed Funds – 5bps
EUR = EONIA – 30bps
GBP = SONIA – 10bps
All other currencies are remunerated at London
Deposit Rate (LDR) – 30 basis points
• NON-CASH: Sovereign and government-guaranteed debt
of: Australia, Austria, Belgium, Canada, Denmark, Finland,
France, Germany, Italy, Luxembourg, the Netherlands,
Norway, Spain, Sweden and the UK
US dollar-denominated securities comprising all U.S.
Treasury securities (except strips) and debentures issued by
FNMA, FHLMC and FHLB.
*Subject to regulatory approval
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LCH.Clearnet SA Collateral Options
Collateral for Initial Margin
• CASH: Sterling, Euros, US Dollars
• Client Deposit Rate is applied to cash posted to cover clientdriven margin requirements. Currently:
USD = Fed Funds – 30bps
EUR = EONIA – 30bps
GBP = SONIA – 35bps
All other currencies are remunerated at London
Deposit Rate (LDR) – 30 basis points
• NON-CASH: Sovereign and government-guaranteed debt
of: French, Belgian, Portuguese, British, Italian, Spanish,
German , Dutch, US.
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Collateral for Variation Margin
• CASH: CDSClear: EUR
Default Rules And Procedures
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LCH.Clearnet Ltd Segregated Default Fund
Note: Although the assets held in a
Default Fund may only be accessed by
the Service to which that Default Fund
relates, Default Fund contributions are
not bankruptcy remote in the event of
LCH.Clearnet’s insolvency. Upon
LCH.Clearnet’s insolvency, all Default
Fund contributions will form part of
LCH.Clearnet’s insolvent estate
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Client Protection In The Case Of Default
Segregation
•
•
Client positions and margin must be segregated from house positions and margin.
Client accounts are segregated from one another and depending on their risk appetite, clients can choose between an Individual
Segregated Account and Omnibus Segregated Account.
Portability
•
Portability of client positions and margin to an alternate clearing member
Return of Collateral
•
In case of a member default, the value of the collateral will be returned to the underlying client and not to the Insolvency
practitioner/estate of the defaulted clearing member.
The legal model must be enforceable along every step of the chain and on a cross border basis.
We currently have approvals in relation to UK, French, German, Swiss, Swedish, Spanish, Dutch, Italian, Irish, Norwegian, Canadian
and Australian SCMs.
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Client Portability: Default Timeline - SwapClear
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CCP Investment Policy
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Treasury Investment Policy
Cash received to cover initial margins and Default Fund contributions is invested in the
following ways:
•Purchase of government securities from a limited range of issuers
•Secured financing - tri-party and bi-lateral reverse repo
•Placement with Central Banks where facility is available to the CCP
•Unsecured deposits with a limited range of credit institutions
•LLC is permitted by group policy and local regulation to invest in Treasury only Money Market Funds
Securities received to cover initial margin:
•LCH.Clearnet accepts and holds in custody a range of high quality liquid financial instruments. Ltd and LLC take a form of
pledge over the assets; SA accept via title transfer, except for the CDSClear where securities are accepted via pledge
The LCH.Clearnet Board has a low appetite for interest rate risk and outright unsecured exposures. Capital related limits are set
for interest rate risk under stress scenarios and for secured outright exposures. The Investment policy ensures that a high
proportion of the portfolio is secured at all times.
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CCP Governance and Capital
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LCH.Clearnet - Regulation, Recognition,
Oversight
LCH.Clearnet Group Limited1
(incorporated in the UK)
Holding
Company
Operating
Entities
LCH.Clearnet LLC2
LCH.Clearnet Limited3
LCH.Clearnet SA4
Location: New York
Location: London
Location: Paris
Organized in Delaware
Incorporated in the UK
Incorporated in France
SwapClear
SwapClear & ForexClear
CDSClear
RepoClear, EquityClear, Brokered
Fixed Income, Equities & Listed
Markets, Exchanges...
Derivatives
Clearing
Services
1.
2.
3.
4.
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Luxembourg
Subsidiary
Regulated as a Compagnie financière by the Autorité de Contrôle Prudentiel (ACP) (France)
Regulated as a Derivatives Clearing Organization by the US Commodity Futures Trading Commission
Regulated as a Recognised Clearing House by the Bank of England, as a Derivatives Clearing Organization by the US Commodity Futures Trading Commission, and by other market
regulators and central banks in jurisdictions in which business is carried out. Payment systems are overseen by the Bank of England
Regulated as a Credit Institution and Clearing House by a regulatory college consisting of the market regulators and central banks from the jurisdictions of: France, Netherlands,
Belgium and Portugal. Regulated as a Recognised Overseas Clearing House (ROCH) by the Bank of England and by other market regulators and central banks in jurisdictions in which
business is carried out. Pending Derivatives Clearing organisation application with the CFTC
Private & Confidential
LCH.Clearnet Ltd Ownership & Governance
LCH.Clearnet Ltd Risk committee
Client
Independents
1
2
LSE
Chairman: Lex Hoogduin (indep.)
1
Client Representative: Mark Barnett
3
Members
Board Composition
LSEG is LCH.Clearnet’s majority shareholder
Chairman
Group CEO
1
1
Other venues
11.2%
Clearing
Members
Independents
57.8%
4
3
LSEG
31%
Venues
LSEG
2
5
Current Users
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Disclosure
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Direct Client Reporting: SwapClear and
ForexClear
SwapClear
Currently Reported
From
18th
November
•General trade level information including maturity date, effective date,
currency, identifiers, status, etc.
•NPV and pricing at a trade and instrument level
•Reference data such as calendars, scenarios, etc.
•End of day IM Margin values report
•IM sensitivity report- SMART compatible
•IMM first principles report- SMART compatible
ForexClear
Currently Reported
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•End of Day values report.
Contacts
LCH.Clearnet Limited
Aldgate House
33 Aldgate High Street
London, EC3N 1EA
Email :
Browse:
[email protected]
www.swapclear.com
Philip Whitehurst
Director, Product Management, SwapClear
+44 20 7426 7362
[email protected]
CDSClear Memebership Enquiries: Malavika Solanki
Director, Head of Business Development, Sales & Marketing
CDSClear
+44 (0)20 7426 7387
[email protected]
ForexClear Membership Enquiries: Annabel Harrison
Member Sales and Relationship Management
+44 (0)20 7426 7347
[email protected]
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Appendix
28
Fee Structures
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LCH.Clearnet Ltd Segregated Default Fund Detail
Key Features of the SwapClear Financial Resource Waterfall
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•
Fully separate SwapClear Default Fund under a “Limited
Recourse” structure
•
All the defaulters’ assets will be exhausted across all
services prior to any mutualisation i.e. any surplus
Initial/Variation Margin and Default Fund contributions from a
service, can be utilised by another service to offset any
excess losses over that specific service’s calculated Initial
Margin
•
The Default Fund contributions are non-fungible i.e. they
cannot be utilised by any other LCH.Clearnet service;
similarly, SwapClear cannot access to the Default Fund
contributions of any other LCH.Clearnet service
•
SwapClear can call for additional Default Fund contributions
should the funded resources be exhausted during a DMP;
however the number of times that SwapClear can call for
additional resources will be limited
•
In extremis and when all the available funded and unfunded
SwapClear Default Fund resources are exhausted, the
SwapClear service will proceed into a Distribution Haircut or
Service Closure phase
Note: Although the assets held in a Default Fund may only be accessed by the Service to which
that Default Fund relates, Default Fund contributions are not bankruptcy remote in the event of
LCH.Clearnet’s insolvency. Upon LCH.Clearnet’s insolvency, all Default Fund contributions will
form part of LCH.Clearnet’s insolvent estate
CDSClear Operational Day
Note: All timings are in CET
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Client Portability: Default Timeline CDSClear
Example
Default – “D”
LCH.Clearnet declares CCM Clearing Member in Default
Client portfolios with Defaulted CDSClear Member are provided to the nominated Alternate CDSClear Member
Alternate CDSClear Member “assents” or “rejects” the client portfolio. Client consents to transfer
EoD+1
 Transfer of Client cleared portfolio to Alternate CCM completed
Morning
Margin Call
on D+2
 Bilateral trades with Default CCM terminated and re-established with
alternate CCM
 Margin transferred to Alternate CCM (subject to chosen margin model)
when margin call is met on D+2
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If no other CCM is found, LCH.Clearnet
SA will liquidate Client positions,
as per its rules
Treasury Investment Policy Detail
•Purchase of government securities - securities issued or explicitly guaranteed by a limited range of high quality governments
are eligible for outright purchase, including UK, US, Australia, Canada and selected European sovereigns, subject to maturity
and concentration limits and adequate liquidity.
•Secured financing – the Group CCPs participate in the bi-lateral and tri-party markets as a cash lender; collateral is acceptable
if issued or explicitly guaranteed by a limited range of high quality governments, is marked-to-market at least daily and subject to
prudent haircuts to cover the risk on the bond, its liquidity and potential fx risk.
•Central Banks – Ltd can place GBP and EUR with the Bank of England; SA is able to place funds in the ECB Euro system of
Central Banks.
•Overnight Unsecured Deposits - deposits are limited in total to a small percentage of the investment portfolio, and only with high
quality credit institutions.
•Money Market Funds (LLC only) - restricted investment in Government MMF, subject to eligibility, the size of the fund and
concentration limits.
Maturity profile is predominantly short term, driven by requirement for liquidity, modelled daily against both operational stress
and member default.
The LCH.Clearnet Board has a low appetite for interest rate risk and outright unsecured exposures. Capital related
limits are set for interest rate risk under stress scenarios and for secured outright exposures. The Investment Policy
ensures that a high proportion of the portfolio is secured at all times.
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Disclaimer
The contents of this document are a broad overview of the SwapClear Client Clearing Service and have been provided to you for
information purposes only.
Nothing in this document should be considered to be legal advice. There is no substitute for analysing the Regulations, Rules and
Procedures of LCH.Clearnet Limited as well as other transaction documentation. Accordingly, clients may not rely upon the contents
of this document and should seek their own independent legal advice.
The information and any opinion contained in this document, does not constitute investment advice or a personal recommendation
with respect to any applicable securities or other financial instruments. This document has not been prepared for a specific client and
accordingly no reliance should be placed on it. Nothing in this document should be taken as a public offer to sell or to buy any
applicable securities of financial instruments.
Your notice is drawn to the Notice to End Users of SwapClear Client Clearing Services at www.lchclearnet.com
Copyright © LCH.Clearnet Limited 2013
All rights reserved. No part of this document may be copied, whether by photographic or any other means, without the prior written
consent of LCH.Clearnet Limited.
SwapClear is a registered trademark of LCH.Clearnet Limited.
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