LCH.Clearnet had a ‘major’ IT failure in December, BOE says

March 25, 2013 06:18 PM
Error affected payment settlement

LCH.Clearnet Ltd., the world’s largest interest-rate swap clearinghouse, had a “major” information-technology failure on Dec. 31 that affected payment processing in the U.K. and hindered contingency plans, the Bank of England said.

London-based LCH.Clearnet restored the systems by the “early evening” so payments could settle as normal, the BOE said in its annual report on the U.K. payment system, published today. The firm is investigating the cause and has plans to prevent it from happening again.

The failure “affected operational processes including payment arrangements,” it said. “The nature of the problem created obstacles to reverting to contingency arrangements and also hindered internal and external communications.”

Clearinghouses such as LCH and those run by CME Group Inc., Intercontinental Exchange Inc., Eurex AG, the Depository Trust & Clearing Corp., and the Options Clearing Corp. have grown more important to the financial system as regulators globally push more trades through them.

LCH said today that the incident “was fully communicated to regulators, exchanges, members and clients at the time.”

‘We identified the issue and took measures to ensure this doesn’t happen again,’’ it said in an e-mailed statement. “There were no financial losses as a result.”

Clearinghouses cut risk by collecting collateral at the start of each transaction, monitoring daily price moves and making traders put up more cash as losses occur. Traders have to deal through clearing members, typically the biggest banks and brokerages. Unlike privately traded derivatives, prices for cleared trades are set every day and publicly disclosed.

BOE Priorities

In its report, the BOE noted incidents including the LCH issue and said one of its priorities for 2013 will be reducing operational risks. It also said it will have an “increased emphasis” on cyber risk.

“Although operational risk cannot be eliminated, systems can take steps to reduce the likelihood of these risks crystallizing and mitigate the impact should they do so,” the BOE said. “The bank will be increasing its focus on how recognized systems manage their operational risks.”

LCH will be 57.8 percent owned by London Stock Exchange Group Plc after a takeover that values LCH at 633 million euros ($819 million). Shareholders of both companies will vote on the transaction this week.

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