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| Originating department: | SwapClear |
| Company Circular No: | LCH.Clearnet Ltd Circular No 2624 |
| Service Circular No: | No 068 |
| Date: | 21 May 2010 |
| To: | All SwapClear Clearing Members |
SwapClear DMP Fire Drill June 2010
Dear SwapClear Member,
We will shortly be conducting a ?fire drill? test of the SwapClear Default Management Process (DMP).
A DMP Fire drill is scheduled for the period between 14 and 22 June 2010.
Participation is mandatory for ALL SwapClear members.
This is a mandatory regulatory activity and all conclusions will be reported to FSA, including any non-compliance with this fire drill.
Given that LCH.Clearnet Ltd went live with the SwapClear Client Clearing Service (SCCS) in December 2009, the objectives of this year fire drill are to test successfully the capacity of LCH.Clearnet Ltd and its members to manage a default of a SwapClear Clearing Member (SCM), clearing for its own accounts and for clients. This will be achieved through simulation of all aspects of a default of a clearing member, and in particular:
- Phase 1: Risk neutralisation of the defaulting SCM portfolio, including liquidated client positions- Phase 2: Transferring of clients to an alternative SCM (?back up SCM?)
- Phase 3: Auction of the defaulting SCM portfolio.
Phase 1 of the DMP fire drill will be a Default Management Group (DMG) exercise taking place on 14 and 15 June 2010 to exercise the Risk Neutralisation stage of the DMP. This session will involve only members of the DMG participating in a simulated instance of the hedging phase of the process.
Phase 2 of the DMP firedrill will take place on 14 June 2010 when LCH.Clearnet Ltd will be publishing the ?stepping in? files and associated SwapClear reports by 11:00 UK time. No particular actions are required from members for this phase from an LCH.Clearnet perspective but members who are, or intend to be a clearing broker, are invited to identify and test the steps that they will have to take in order to onboard as an alternate SCM a client within 24/48 hours.
Phase 3 requires the participation of all SwapClear members, including new joiners.
All Members will be required to test and re-confirm their ability to manage the process of downloading a set of hedged currency dummy default portfolios (?the hedged portfolios?) from the LCH.Clearnet website, valuing these portfolios in their internal risk management systems and providing LCH.Clearnet with accurate valuations and bids on a timely basis.
The hedged portfolios that are produced following the hedging exercise will become the files for the member auction.
Four individual currency portfolios will be provided to members in the auction files: USD, EUR, GBP and AUD portfolios consisting of approximately 48 500, 20 000, 10 000 and 1000 trades respectively.
GUIDANCE NOTES FOR ALL AUCTION / VALUATIONS:
- The value date for the exercise will be Monday 21 June. Timings for the valuation will vary according to the currency of the portfolio being auctioned.
- The valuation deadline for the exercise will be Monday 21 June at 16:00 UK time for the USD auction and Tuesday 22 June at 18:00 UK time for the EUR, GBP and AUD valuations.
- The auction files will be available in both csv and FpML formats.
The four hedged portfolio files and the associated SwapClear reports will be available for download on 16 June after close of business from:
- the SwapClear Member Reporting Test, https://membertest.lch.com:444, . A specific DMP sub-directory will be used for this purpose at Public/SwapClear/DMP. Members can use their existing Member Test IDs (starting with STST_) and passwords to access the site but should ensure that they have access to the website and connectivity in advance of the start of the firedrill week.
In addition, the auction files and SwapClear reports will be posted on the secure area of the LCH.Clearnet website http://www.lchclearnet.com/secure_area/default.asp (for which separate logins are available by registering on http://www.lchclearnet.com/secure_area/register.asp?access=SwapClearmember).
- For the purposes of the exercise the ?defaulting? side for each of the portfolios will be represented by the BIC LCHLGB22. The SwapClear reports represent the portfolio from the perspective of the winning bidder.
- SwapClear members participating in the test will be expected to provide accurate valuations in the form of a bid and forward a sign-off certificate to the email address [email protected].
Valuations / bids will represent the amount in local currency that the member is prepared to pay or receive for the portfolio being auctioned. The email bid / valuation should use the words:
<< ABC bank will pay or receive LCH [single currency amount] for the [currency] portfolio>>
GUIDANCE NOTES FOR THE USD VALUATION:
- The deadline for the ?live? USD auction will be Monday 21 June at 16:00 UK time.
- Members will be required to provide a ?live? auction valuation no later than 16:00 UK time on Monday 21 June taking into account prevailing prices and bid/offer spreads.
- Outside of this ?live? auction, members are invited to provide a USD mid-market valuation no later than the following day Tuesday 22 June at 18:00 UK time.
- The winning bidder will be responsible for settling all the cash flows with a value date of Wednesday 23 June and onwards.
LCH.Clearnet will be responsible for settling all the cash flows with a value date up to and including Tuesday 22 June.
GUIDANCE NOTES FOR THE SUBMISSION OF THE EUR AND GBP VALUATIONS:
- The deadline for the EUR and GBP auctions will be Tuesday 22 June 18:00 UK time.
- Members will be required to provide a mid-market valuation taking into account prevailing prices and bid/offer spreads around 16:15 UK time on Monday 21 June.
- The winning bidder will be responsible for settling all the cash flows with a value date of Wednesday 23 June and onwards.
LCH.Clearnet will be responsible for settling all the cash flows with a value date up to and including Tuesday 22 June.
GUIDANCE NOTES FOR THE SUBMISSION OF THE AUD VALUATION:
- The deadline for the AUD auction will be Tuesday 22 June 18:00 UK time.
- Members will be required to provide a mid-market valuation taking into account prevailing prices and bid/offer spreads around 12:00 UK time on Monday 21 June.
- The winning bidder will be responsible for settling all the cash flows with a value date of Thursday 24 June and onwards.
LCH.Clearnet will be responsible for settling all the cash flows with a value date up to and including Wednesday 23 June.
Members should ensure that all the appropriate internal data that is required to support the relevant valuations is available within their organisations. It is important to ensure that portfolios are correctly valued as per instructions above, as the success of the exercise will be measured by the proximity of members? valuations of the hedged portfolios to LCH.Clearnet?s valuations.
Date and Time (UK) | Activity |
| 14 June 2010
by 10:00 | Stepping-in files (in csv and FpML formats) and corresponding SwapClear reports available on the SwapClear Member Reporting Test Site https://membertest.lch.com:444/ or on the secure area of the public website |
| 16 June 2010
by 18:00 | Auction files (in csv and FpML formats) and corresponding SwapClear reports available on the SwapClear Member Reporting Test Site https://membertest.lch.com:444/ or on the secure area of the public website |
| 17 / 18 and 21 June 2010 | SwapClear reports refreshed and published on the SwapClear Member Reporting Test Site https://membertest.lch.com:444/ or on the secure area of the public website |
| 21 June 2010
16:00 | Deadline for members to submit ?live? valuation in the form of a bid by-mail address [email protected] for the USD auction |
| 22 June 2010 18:00 | Deadline for members to submit mid-price valuation in the form of a bid for the EUR. GBP and AUD auctions |
| 23 June 2010 | LCH.Clearnet communicate auction results to members |
All SwapClear members are obliged to participate in the DMP Fire drill. The test is NOT optional.
SwapClear members are signatories of the Default Management Process Agreement (DMPA) and are required to demonstrate that they can fulfill the obligations required of them therein. As the fire drill is a mandatory regulatory activity, all conclusions will be reported to the FSA, including any non-compliance with this firedrill.
Going forward, DMP end-to-end firedrill will be taking place every six month. Members are strongly recommended to put in place documented and formalised internal processes, as well as the necessary resources, to comply with the DMP fire drill.
To assist with communication, we will be establishing a mailing list to ensure that the appropriate people in each of the SwapClear member organisations receive information on the DMP process on an on-going basis. To that effect, we would be grateful if you could confirm back to us the appropriate DMP contact details.
Please do not hesitate to contact Lois Blazy (or your usual SwapClear contact) if you require any further details.
| Lois Blazy |
| Commercial Services |
| SwapClear |
| LCH.Clearnet Ltd |
| +44 (0)207 426 7452 |
| [email protected] |