LCH.Clearnet Overview
April 2010 LCH.Clearnet Background
LCH.Clearnet Group Ltd:
The world’s leading independent central counterparty
Owned 83% by users and 17% by exchanges
Operates a constrained profit model
The largest and most experienced global clearer of OTC markets
Clears for major international trading platforms and exchanges
2 SwapClear: The Successful Global Swap Clearing Solution
Global leader in Interest Rate Swaps clearing
Established in September 1999
Outstanding notional of $212 trillion (end March 2010)
Largest OTC IRS product range of any Clearing House, globally
RCH regulated by the FSA in the UK
DCO regulated by the CFTC in the USA
SwapClear Total Trade Sides Notionals ($bn) 250,000
200,000
150,000
100,000
50,000
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3 SwapClear: Product Range
Current State Planned Enhancements
Clears over 40% of all OTC IRS Q2 2010 Offers buy-side clearing facilities Extension of operating hours to 17.00 EST (22.00 GMT/BST)
Opening hours for trade registration: 07:30-19:30 Tenor extension to 50 yrs & beyond for USD, GBP, EUR and to 30 GMT/BST (14.30 EST) yrs for AUD, CAD, CHF, SEK
14 currencies eligible for clearing: Single currency Basis Swaps USD EUR JPY GBP Zero Coupon Swaps
AUD HKD NZD CAD Q3 2010
CHF DKK SEK NOK Forward Rate Agreements
PLN ZAR Next generation clearing technology
Both Libor and Fed Funds Indices 2011
USD, EUR, GBP, JPY Vanilla IRS out to 30 years Expansion of Currency set
USD, EUR, GBP, CHF Overnight Index Swaps (OIS) Additional products TBD e.g.
Compounding Swaps Options, callable, cancellable
T+0 Clearing Cross Currency Swaps Trade Compression for Inter-dealer trades
Trade Backloading – Legacy IRS portfolios can be cleared
4 Default Management Protection
5 SwapClear: Risk and Default Management
SwapClear is set up so that managing a default is a Business As Usual event
All clearing members default management responsibilities are proven and legally binding
SwapClear has a clearly defined and comprehensive list of market counterparties who are already committed to bidding on a swaps portfolio in a default scenario
Fully tried and tested Default Management Process (Lehman’s etc.)
Default management process designed to cope with the hypothetical defaults of a number of members over several scenarios
Default Management follows an established process and timeline; portfolio hedging followed by a competitive auction
No ‘fire sale’. In the unlikely event of an uncompetitive auction LCH reserves the right to allocate positions at market rates.
Bi-annual fire drills to ensure our process remains robust
Driving test for new members to prove their operational capability
6 SwapClear: Operations
Operational Risk
Robust Business Continuity Plan (London Bombings)
Regular Fail over Testing and Disaster Recovery Plan
High Level Security and IT Information Security Company regulations
Mandatory security checks and high level of compliance management given regulatory oversight (FSA, CFTC)
Interoperability
Follow best market practice and remain agnostic to interface protocols
Membership Open to all market participant by direct and indirect membership
All SwapClear clearing members have the financial and operational capacity and otc IRS expertise to successfully handle a default scenario
SwapClear membership criteria specifically focused on efficiently handling defaults and minimising the risk of an SCM default
7 SwapClear Default Protections: OTC Risk Partition
First three levels of protection are not mutualised 1. Membership Criteria. SwapClear membership Membership Criteria criteria focussed on efficiently handling defaults and minimising risk of an SCM default in the first place Variation Margin 2. Variation Margin. Prevent member losses building up over time so as to minimise potential exposure at default Initial Margin 3. Initial Margin. To ensure LCH.Clearnet Ltd has sufficient financial resources to cover potential losses and close out in a default situation Defaulter’s own Default Fund Contribution Default Funds and £20mm capital and reserves are mutualised across LCH.Clearnet Ltd. Note that CDS LCH.Clearnet’s capital & reserves to £20mm is handled by LCH.Clearnet SA and not LCH.Clearnet Ltd .
Remaining Default Fund (currently £600m)
Additional Provision of £50mm per SwapClear SwapClear Undertaking (£50mm per SwapClear Member) member (currently 28 members). This is not mutualised across other products
Replenishment of LCH.Clearnet’s Capital Optional Replenishment
8 SwapClear: Unique Feature eliminates Credit Risk
Client positions & margin are segregated from house and other client accounts at LCH.Clearnet
LCH.Clearnet This unique feature eliminates credit
House Client Client risk between clients and clearing Position & Position & Position & member and unknown risks of other Margin Margin Margin clients. 2
Defaulting SCM Alternate SCM Segregated from from House Segregated Segregated from from House Segregated 3 House Client Client Client
Position & Position & from from other other clients clients Segregated Segregated Position & Position & Margin Margin Margin Margin
1 3 Client A Client X Client A ClientClient
9 SwapClear Membership: 28 SCMs
Bank of America NA ING Bank NV
Banca IMI S.p.A JP Morgan Chase Bank NA
Barclays Bank PLC Merrill Lynch International Bank Limited
BNP Paribas Morgan Stanley Capital Services, Inc
Credit Agricole Natixis SA
Citi Nomura International PLC
Commerzbank AG Nomura Global Financial Products
Credit Suisse International Rabobank International
Credit Suisse Securities (Europe) Limited The Royal Bank of Scotland PLC
Deutsche Bank AG Royal Bank of Canada
Goldman Sachs Bank USA Royal Bank of Scotland NV
Goldman International Société Générale
HSBC Bank plc Standard Chartered
HSBC France UBS AG
Additional firms to join in 2010
10 SwapClear – US & UK contacts
New York Office London Office LCH.Clearnet Limited LCH.Clearnet Limited 14 Wall Street Aldgate House 4th Floor, Suite 4G 33 Aldgate High Street New York, NY 10005 London, EC3N 1EA USA UK
Eddie Watts Phillip Atkinson Senior Country Advisor Senior Manager SwapClear Sales & Marketing +1 212 513-8299 +44 (0) 20 7426 6389 [email protected] [email protected]
Andrew McGuire Kim Short SwapClear Sales & Marketing SwapClear Sales & Marketing +1 212 513-8288 +44 (0)20 7426 7939 [email protected] [email protected]
11 Disclaimer
The contents of this document are a broad overview of the Please note that the SwapClear Client Clearing Service is still SwapClear Client Clearing Service and have been provided to you subject to regulatory approval in certain jurisdictions and, for information purposes only. therefore, the service described in these slides is subject to change.
Nothing in this document should be considered to be legal Your notice is drawn to the Notice to End Users of SwapClear Client advice. There is no substitute for analysing the Regulations, Rules Clearing Services at www.lchclearnet.com and Procedures of LCH.Clearnet as well as the other transaction documentation. Accordingly, clients may not rely upon the contents of this document and should seek their own independent legal advice. Copyright © LCH.Clearnet Limited 2009 -2010. All rights reserved. No part of this document may be copied, The information and any opinion contained in this whether by photographic or any other means, without the document, does not constitute investment advice or a prior written consent of LCH.Clearnet Limited. personal recommendation with respect to any applicable SwapClear is a registered trademark of LCH.Clearnet Limited securities or other financial instruments. This document has not been prepared for a specific client and accordingly no reliance should be placed on it. Nothing in this document should be taken as a public offer under any applicable legislation or an offer to sell or to buy any applicable securities or financial instruments.
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