LCH.Clearnet Ltd’s (LCH.Clearnet) SwapClear Futures Commission Merchant (FCM) service was launched yesterday. U.S. interest rate swap (IRS) clients are now able to access this market leading service through any of the 12 FCMs already connected to the service. Six clients have cleared executed OTC IRS trades on SwapClear in a variety of maturities and currencies, including USD, EUR and GBP.
The 12 FCMs connected to the service are: Bank of America Merrill Lynch; Barclays Capital; BNP Paribas Securities Corp; Citigroup; Credit Suisse Securities USA LLC; Deutsche Bank Securities, Inc.; Goldman Sachs & Co; J.P. Morgan Futures Inc.; Morgan Stanley; Nomura Securities Int’l Inc.; RBS Securities Inc. and UBS Securities, LLC. In addition, HSBC Securities USA has confirmed its intention to join shortly as an FCM.
Floyd Converse, Head of U.S Sales and Marketing, said; “U.S. clients are increasingly focused on how the regulations resulting from the implementation of the Dodd-Frank Act will affect them. SwapClear FCM provides the broadest OTC interest rate swap product scope of any clearing service in the world. Features such as flexible payment dates, flexible LIBOR indices, OIS discounting and 14 currencies are not matched by another clearer. These are available within the protections of an FCM framework; regulated by the CFTC and subject to U.S. law. We will continue to develop and strengthen products and services to U.S. clients as client clearing evolves.”
Richard Prager, Managing Director, BlackRock said; “The timing of SwapClear’s FCM launch gives us the opportunity to partner with them to fully prepare for Dodd-Frank. From a client perspective, SwapClear has an opportunity to strategically develop its buy-side offering to accommodate buy-side needs, ahead of the regulatory change, so it is in a position to facilitate clearing for all market participants lockstep together.”
U.S. clients will benefit from reduced counterparty risk, default protection, proven default management expertise, portability of client collateral and positions and initial margin collateral held solely in the U.S. and fully subject to U.S. law and the Commodity Exchange Act (CEA). SwapClear’s U.S. clients are now able to access the service’s broad product range, which covers over 90% of the “plain vanilla” IRS market, and which will be expanded later this year to cover USD denominated amortizing swaps. SwapClear currently clears trades in 14 currencies and tenors out to 50 years.
Established more than 11 years ago, SwapClear is the only truly global clearing service for IRS. Since launch in 1999, it has cleared over 1.5 million OTC IRS trades, approximately 35% of which are U.S. dollar denominated. SwapClear currently has 49 clearing members, including the 12 FCMs, and its portfolio contains 850,000 trades with a notional value in excess of $266 trillion, down from $305 trillion as a result of terminating $39 trillion cleared IRS transactions through on-going compression. It is the only OTC clearing service to have successfully handled a significant OTC default, when it resolved Lehman Brothers’ $9 trillion IRS default in 2008. In that instance, SwapClear’s default management process ensured that more than 66,000 trades in five currencies were hedged and auctioned to other clearing members. SwapClear’s process resulted in no loss to any market participants.
In June 2010, following extensive industry consultation, LCH.Clearnet became the first derivatives clearing house in the world to use overnight index swap (OIS) rate curves to discount IRS. This important step not only ensured the highest standards of risk management within a CCP; it has also increased certainty and transparency in the interest rate swap market more generally. This type of industry thought leadership was recognized by Risk Magazine in naming LCH.Clearnet 2011 Clearing House of the Year in its Risk Awards.
LCH.Clearnet has been a CFTC registered Derivatives Clearing Organization clearing OTC IRS since 2001 and, in 2010, cleared over 120,000 trades involving U.S. counterparties, with a notional value of over $64 trillion.