LCH.Clearnet to revalue JPY trades in SwapClear using OIS

25 August 2011

LCH.Clearnet Ltd’s (LCH.Clearnet) market-leading interest rate swap (IRS) clearing service SwapClear is to begin using the overnight index swap (OIS) curve to discount Japanese Yen IRS trades from October 2011. The total outstanding notional value of IRS denominated in JPY within SwapClear is currently ¥ 1417 trillion, comprising over 12% of the total SwapClear portfolio by value. 

In June 2010, LCH.Clearnet became the first clearing house in the world to use OIS to discount USD, Euro and GBP IRS trades.  With an increasing proportion of trades now being priced using OIS discounting instead of LIBOR, the move to OIS  followed extensive industry consultation and ensures the most accurate valuation of LCH.Clearnet’s portfolio for risk management purposes.

Michael Davie, CEO, SwapClear said:  “To manage risk effectively, it is essential to evolve and adapt in line with industry developments. OTC derivative pricing has undergone significant changes recently and customers need consistent, accurate solutions that can be relied upon. This important move underscores our dedication to increasing certainty and transparency in the IRS market.”

Established nearly 12 years ago, SwapClear is the only truly global clearing service for IRS. Since launch in 1999, it has cleared over 1.6 million OTC IRS trades. SwapClear currently has 57 clearing members and its portfolio contains 950,000 trades with a notional value in excess of $300 trillion. A further $66 trillion of cleared transactions were removed through multilateral trade compression. SwapClear 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 December 2009, LCH.Clearnet was the first clearing house to launch IRS clearing for buy-side clients through SwapClear, offering a unique level of security to clients in the case of a bank default through margin segregation and portability of contracts. LCH.Clearnet has expanded its presence in the U.S with an office in New York and the appointment of a government affairs representative in Washington.  The launch of the FCM (Futures Commission Merchant) model has increased choice for US based customers, enabling them to clear through SwapClear within a familiar framework.

To view the press release as a pdf click here.

About LCH.Clearnet

LCH.Clearnet Group Limited 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, commodities, energy, freight, interest rate swaps, CDS,  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 members’ 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.