lch.clearnet: ima clearing house day 12 th november 2013 philip whitehurst: director. product...

LCH.Clearnet: IMA Clearing House day 12th November 2013

Philip Whitehurst: Director. Product Management, SwapClear

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Contents1. Application for EMIR Authorisation2. Product Scope3. Customer Protection Offerings4. Margin and Collateral5. Default Rules and Procedures6. CCP Investment Policy7. CCO governance and Capital8. Disclosure

Private & Confidential

3

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


4

Scope of Clearing Services


5

The Markets We Serve


6

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 acceptedVs, USD

LATAM: BRL, CLP, COPASIAN: CNY, IDR, KRW, MYR, PHP, TWDEMEA: 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*



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Customer Protection Offerings


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Customer Protection Account Offerings- SwapClear

Value Segregated accounts Asset Segregated Accounts

ValueOmni ValueSeg AssetOmni AssetSeg CustodialSeg

Omnibus Segregated

Account

Individual Segregated

Account

Omnibus Segregated

Account


Account


Account

Least Protection Most Protection


In development

and subject to regulatory approval

Type of Account

Name of Account

EMIR Grading

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Trade Submission: T2 Model

1.Trade Execution, Allocation & Affirmation

CP 1 and CP 2 agree to a transaction on the SEF/affirmation platform:

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


T2 Model

CP2CP11

Affirmation Platform

LCH.ClearnetCP2

Clearing Broker

CP1Clearing Broker

3

2

3

11

8:20

7:30

9:00

12:00

16:15

20:00

19:05

13:15

00:00

00:30

00:07

RTTR Opens

1st Price Snap2nd Price Snap

3rd Price Snap

RTTR closes

Deadline for CM to agree irrevocably to pay EOD margin call

APAC CurveSnap

EMEA Curve Snap

NA Curve Snap

EOD Margin Run

Netting Cycle

LDN

NYC

EOD Processes

Intra-day Processes

Real Time Trade Registration - SwapClear


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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

• 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.

Initial Margin

• 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

Variation Margin


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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

• Client deposit rate is applied to cash posted to cover client-driven margin requirements. Currently:

USD = Fed Funds – 5bpsEUR = EONIA – 30bpsGBP = SONIA – 10bpsAll 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.

Collateral for Variation Margin (SwapClear)• CASH: SwapClear: In the local currency of the trade



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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 client-driven margin requirements. Currently:

USD = Fed Funds – 30bpsEUR = EONIA – 30bpsGBP = SONIA – 35bpsAll 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.

Collateral for Variation Margin• CASH: CDSClear: EUR


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Default Rules And Procedures

Private & Confidential | 16


17

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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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.

Treasury Investment Policy


22

CCP Governance and Capital


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LCH.Clearnet - Regulation, Recognition, Oversight

1. Regulated as a Compagnie financière by the Autorité de Contrôle Prudentiel (ACP) (France)2. Regulated as a Derivatives Clearing Organization by the US Commodity Futures Trading Commission3. 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 England4. 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

Holding Company

Operating Entities

Clearing Services

LCH.Clearnet Group Limited1

(incorporated in the UK)

LCH.Clearnet LLC2

Location: New York

Organized in Delaware

LCH.Clearnet SA4

Location: Paris

Incorporated in France

LCH.Clearnet Limited3

Location: London

Incorporated in the UK

Luxembourg Subsidiary

SwapClear & ForexClear

RepoClear, EquityClear, Brokered

Markets, Exchanges...

CDSClear

Fixed Income, Equities & Listed

Derivatives

SwapClear


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Board Composition

Independents

Members

LSE

ClientLCH.Clearnet Ltd Risk committee

LSEG is LCH.Clearnet’s majority shareholder

LCH.Clearnet Ltd Ownership & Governance

LSEGLSEG

Independents

Venues

Group CEO

Chairman

Clearing Members

Other venues

31%57.8%

11.2% 1

3

5

4

2

1

2

1

1

3

Chairman: Lex Hoogduin (indep.)

Client Representative: Mark Barnett


Current Users

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Disclosure


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Direct Client Reporting: SwapClear and ForexClear


SwapClear

Currently Reported

•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.

From 18th November•End of day IM Margin values report•IM sensitivity report- SMART compatible•IMM first principles report- SMART compatible

ForexClear

Currently Reported •End of Day values report.

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Contacts

Philip Whitehurst

Director, Product Management, SwapClear

+44 20 7426 7362

[email protected]

LCH.Clearnet Limited Aldgate House

33 Aldgate High Street

London, EC3N 1EA

Email : [email protected]

Browse: www.swapclear.com


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]

mailto:[email protected]

mailto:[email protected]

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Appendix

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Fee Structures

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LCH.Clearnet Ltd Segregated Default Fund Detail

Key Features of the SwapClear Financial Resource Waterfall

• 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

Private & Confidential 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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Note: All timings are in CET

CDSClear Operational Day


32

Client Portability: Default Timeline CDSClear Example


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

Transfer of Client cleared portfolio to Alternate CCM completed

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

If no other CCM is found, LCH.Clearnet

SA will liquidate Client positions,

as per its rules

EoD+1

Morning Margin Call

on D+2

Default – “D”

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•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.

Treasury Investment Policy Detail


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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 2013All 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.


lch.clearnet: ima clearing house day 12 th november 2013 philip whitehurst: director. product...

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