LCH is rolling out a number of enhancements to its clearing services over the coming months that are aimed at enhancing collateral protections and operational efficiencies for its customers.
The U.K. clearinghouse currently offers a range of customer protection options for non-U.S. clients and plans to introduce another option, CustodialSeg, for clients that want a higher level of protection and control. This type of account not only segregates client positions and assets from all other clients, but also allows clients to directly deliver collateral to the clearinghouse. According to LCH, CustodialSeg minimizes "transit risk" of collateral movements and enables a client to continue to deliver margin even after a clearing member default.
LCH also is working to enhance the process of transferring client positions. John Horkan, head of SwapClear North America, said the clearinghouse is working to make the process of moving positions from one clearing broker to another more efficient by improving its ability to process a large number of positions and accounts on an intraday basis.
Another example of improved efficiency is the introduction of what LCH calls a "clearing broker allocation API." This is aimed at addressing a demand from clearing brokers that handle bunched orders on behalf of their clients. The clearinghouse is introducing a new functionality that will allow clearing brokers to send allocations directly to LCH, rather than relying on the trading venue or a middleware provider.
LCH also has implemented a new option to the way that variation margin on cleared swaps is characterized. Under its new rules, which have already taken effect for dealers, variation margin paid to the clearinghouse can be characterized as a "settlement payment" from a legal perspective rather than as collateral, in line with the standard practice in futures markets. The change in treatment has the potential to reduce the capital charges for members and, pending regulatory approval, will also benefit futures commission merchants and clients. To provide more flexibility, LCH is working on a system change that will give clearing firms the option to use this method more selectively, rather than applying it to the member’s entire portfolio of cleared positions.
Also coming soon is the launch of LCH's portfolio margining service called Spider, which will allow SwapClear to reduce the margin on cleared swap positions by offsetting listed futures and swaps positions. Once approved by regulators, the service will be available for eligible futures contracts traded on NLX, the London-based exchange operated by Nasdaq. Later in the year LCH expects to add CurveGlobal, the new interest rate futures exchange set up by LCH's parent, London Stock Exchange Group. Initially the service will be limited to short-term interest rate futures denominated in pounds sterling and euros. The second phase will cover long term interest rate futures such as long gilts, bund, bobl and schatz futures.
The service will work by automatically transferring eligible futures positions into a SwapClear account whenever there are sufficient offsets on initial margin. The combined portfolio will be margined using LCH's PAIRS methodology, which is a VaR-based system that uses 10 years of market data to run historical simulations and a seven-day close-out period for calculating losses from a client default (five days for members).
Last but not least, LCH is expanding the range of swap markets that it serves. Earlier this year it announced approvals from regulators in Japan and Singapore that will allow it to offer its clearing services to local banks and other entities in those jurisdictions. In the case of Japan, LCH was the first overseas clearinghouse to receive a license to offer clearing of interest rate swaps directly to Japanese banks, rather than their international subsidiaries.
Next up is Mexico. Horkan said customers in the U.S. are asking for LCH to support the clearing of interest rate swaps denominated in Mexican pesos. LCH is now seeking regulatory approval for this expansion, which would bring the number of currencies covered by SwapClear to 18.