LCH.Clearnet welcomes presidential signing of U.S. financial reform legislation

Venerable clearinghouse supports new law's mandate to reduce risk and increase transparency in the OTC derivatives market

London, 21 July 2010

LCH.Clearnet Limited (LCH.Clearnet), the global leader in interest rate swap clearing, applauded today's signing of the Wall Street Reform and Consumer Protection Act. The global clearing house had urged for the bill's passage because of the new law's provisions designed to reduce risk and increase transparency in the OTC (over-the-counter) derivatives market through mandated clearing.

LCH.Clearnet currently clears more than 40% of the IRS (interest rate swap) market representing trades with a total notional principal of $224 trillion in 14 currencies; of which $85 trillion is in U.S. dollars. LCH.Clearnet is expanding its presence in the U.S. marketplace to meet the increasing demand for its services catalyzed by the new law.  

"LCH.Clearnet welcomes President Obama's signing of this landmark piece of legislation and congratulates the President and the Congressional leadership for bringing greater transparency and risk reduction to the world's financial markets," said Roger Liddell, CEO of LCH.Clearnet.

"Our corporate mission has always been to reduce risk and foster greater stability throughout the global financial system and in particular the OTC derivatives market. By mandating the clearing of instruments through systems like our SwapClear service, the new law takes major steps in preventing another financial crisis from occurring."

LCH.Clearnet has planned several initiatives in the U.S. market that it will be rolling out in 2010 to provide increased options and capabilities to its U.S.-based clientele, including a 24-hour clearing service and the introduction of a Futures Commission Merchant (FCM) model to its SwapClear system. Pending regulatory approval, FCM access will be available before the end of the year and will offer protections including margin collateral being held in the U.S., portability of client collateral and positions, and arrangements governed under New York State law.

"Our successful unwinding of Lehman Brothers $9 trillion interest rate swap default during the crisis of 2008, exemplifies how clearing can provide an essential backstop to the financial system, without involving taxpayer dollars," added Mr. Liddell. "We stand ready to meet all requirements under the new law and look forward to expanding our presence in the U.S. market."

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About LCH.Clearnet

LCH.Clearnet is the leading independent clearing house group, serving major international exchanges and platforms, as well as a range of OTC markets.  It clears a broad range of asset classes including: securities, exchange traded derivatives, energy, freight, interbank interest rate 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.