LCH.Clearnet SA (LCH.Clearnet) has enhanced the clearing functionality of its CDS offering in line with best market practice. These enhancements, which have been designed and tested in collaboration with its clearing members, include:
- Refinements to the risk management framework
- Integration of the DTCC’s new automated credit events procedures (implemented 4 October 2010)
- Implementation of CLS system connection for product related cash flows settlement; margins still flow through Target 2
Commenting on the initiative, Christophe Hémon, Chief Executive, LCH.Clearnet SA said: “The collaboration and dedication of our clearing members is critical to the enhancement of our services. We seek to build clearing models which fit with current market practices and which answer our members’ needs, whilst, at the same time responding to the regulatory push to reduce systemic risk by bringing more OTC products into clearing. We welcome recent policy developments and are well placed to operate within the proposed European rules for CCPs.”
The CDS clearing service was launched on 31 March 2010, as at 24 September 2010 the notional value of 622 contracts cleared by the service amounted to €22 billion and open interest of €1,6 billion.
LCH.Clearnet is the leading independent clearing house group, the world’s largest clearer of OTC derivatives and in addition serves major international exchanges and platforms. It clears a broad range of asset classes including: securities, exchange traded derivatives, commodities, energy, freight, interest rate swaps, credit default swaps and euro and sterling denominated bonds and repos; and works closely with market participants and exchanges to identify and develop clearing services for new asset classes.
A clearing house sits in the middle of a trade, assuming the counterparty risk involved when two parties (or members) trade. When the trade is registered with a clearing house, it becomes the legal counterparty to the trade, ensuring the financial performance; if one of the parties fails, the clearing house steps in. By assuming the counterparty risk, the clearing house underpins many important financial markets, facilitating trading and increasing confidence within the market.
Initial and variation margin (or collateral) is collected from clearing members; should they fail, this margin is used to fulfill their obligations. The amount of margin is decided by the clearing house’s highly experienced risk management teams, who assess a member’s positions and market risk on a daily basis. Both the soundness of the risk management approach and the resilience of its systems have been proven in recent times.
LCH.Clearnet is regulated or overseen by the national securities regulator and/or central bank in each jurisdiction from which it operates.