LCH.Clearnet’s SwapClear Futures Commission Merchant Service set to go Live for U.S. Customers

-- FCM Service will give U.S. customers protections under Commodities Exchange Act --

-- Regulatory requirements complete, launch date March 8 --

LCH.Clearnet Ltd (LCH.Clearnet), the world’s leading independent clearing house, will launch its SwapClear Futures Commission Merchant (FCM) service for U.S. clients on March 8, 2011, as all regulatory requirements are now complete. LCH.Clearnet has been a CFTC registered Derivatives Clearing Organization clearing OTC interest rate swaps (IRS) since 2001 and, in 2010, cleared over 120,000 trades involving U.S counterparties, with a notional value of over $64 trillion.

U.S. customers will access LCH.Clearnet’s SwapClear service through a U.S. based FCM of their choice.  This is an important milestone in SwapClear’s supporting compliance by U.S. customers with the range of provisions foreseen within the terms of the Dodd-Frank Act.  SwapClear hereby offers end-user clients the centralized clearing of an unparalleled range of OTC IRS via the well-established FCM network under CFTC regulation.

“SwapClear sets the standard globally for OTC clearing,” said Floyd Converse, Head of U.S. SwapClear Sales and Marketing. “Beginning on March 8, U.S. clients will be able to access SwapClear’s unique expertise and product range within the security of the familiar FCM framework.”

The SwapClear FCM model will offer U.S. customers several key benefits, including:

• Reduced counterparty risk
• Default protection
• Proven default management expertise
• Portability of client collateral and positions
• Initial margin collateral held solely in the U.S. and fully subject to U.S. law and the CEA

In addition, SwapClear’s U.S. customers will benefit from the service’s broad product range, which covers over 90% of the “plain vanilla” IRS market, and which will be expanded in 2011 to cover U.S. dollar 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 close to 1.5 million OTC IRS trades, approximately 35% of which are U.S. dollar denominated.  SwapClear currently has 37 clearing members and its portfolio contains 850,000 trades with a notional value in excess of $252 trillion, down from $291 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 5 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 clearinghouse 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.  

To view the press release as a pdf click here.

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About LCH.Clearnet

LCH.Clearnet (then The London Produce Clearing House Limited) began clearing commodity futures in 1888.  Today it 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, 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, reducing risk, facilitating trading and increasing confidence within the market.

Initial and variation margin (both 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;  in IRS, 6 times intraday.  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.