LCH Launches Portfolio Margining

Shanny Basar

LCH, the clearing business of the London Stock Exchange Group, plans to add further eligible contracts to the portfolio margining service launched this week.

LCH Spider, a portfolio margining tool for interest rate derivatives, went live at the beginning of this week. Eligible members and clients using LCH’s SwapClear and Listed Rates services can now offset margin between over-the-counter and listed interest rate derivatives in order to decrease the combined initial margin they have to pay.

Daniel Maguire, global head of rates and foreign exchange derivatives, said at a media briefing yesterday: “We are starting with short-term interest rate futures but the plan is to add further eligible contracts in line with customer demand, subject to regulatory approval.”

Portfolio margining is initially available for sterling and euro-denominated short-term interest rate futures cleared by LCH – which are those traded on Nasdaq NLX. In the third quarter of this year LCH Spider is also set to include futures contracts from CurveGlobal, the interest rate derivatives joint venture that the London Stock Exchange is launching with a number of major dealer banks and CBOE.

LCH said the implementation of MiFID II, the new regulations covering financial markets in the European Union from 2018, will further drive the possibility of greater risk offsets through encouraging open access, i.e allowing members to choose where to clear their trades regardless of where they are traded. For example, trades executed on Deutsche Börse currently have to be cleared by the German exchange.

Maguire said: “With the world’s largest interest rate derivatives liquidity pool at SwapClear and our open access approach, LCH Spider represents the next step in portfolio margining and is a compelling offering for those looking to manage their risk and collateral obligations more efficiently.”

Last week LCH said SwapClear has compressed trades representing $1 quadrillion in notional since it started offering compression services in 2008. Compression allows clearing members and their clients to “tear-up” offseting trades while maintaining the same risk profile to reduce the notional outstanding and number of line items in their portfolio. This reduces operational risk and capital requirements for the portfolio. SwapClear offers a number of types of compression via LCH proprietary services and through TriOptima’s triReduce service.

Mandated clearing of certain interest rate swaps will begin in Europe next month.

“Since the move to clearing in the US since 2013 there was an initial move to just comply with the regulation, then members’ and clients’ focus shifted to trying to improve operational efficiency,” added Maguire. “Now the objective is to look for capital, margin and risk efficiencies through services such as compression and portfolio margining.”

The London Stock Exchange said in its 2015 full-year results in March that SwapClear cleared record volumes of trades last year and successfully launched clearing of inflation swaps.

The results statement said: “This leadership position has also resulted in the emergence of a price difference associated with where to clear a swap. We believe that this structural shift, with a price divergence depending on the particular clearing house through which a trade is cleared, will remain and LCH is well positioned to benefit from this.”

This week LCH said it will start equities clearing on Goldman Sachs’ Sigma X MTF from July 2016 taking clearing to 17 active interoperable European equities trading venues.

LCH added that volumes through EquityClear were 204 million trades in the first quarter of this year, 30% up on the same period in 2015, reflecting an increasing trend for clearing members to consolidate their cash equities clearing through a single central counterparty as well as the addition of new venues.

David Shrimpton, head of market structure, EMEA equities at Goldman Sachs, said in a statement: “We continue to enhance Sigma X MTF to meet the future needs of our clients and trading participants as the equities trading model evolves ahead of MiFID II implementation. Interoperability is a key part of the post-trade market infrastructure and we’re pleased to offer a choice of CCPs for Sigma X MTF.”

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