SwapClear: Revised initial Margin Multipliers

Dear SwapClear Member,

Following a review of market liquidity LCH.Clearnet has revised the Initial Margin Multiplier trigger levels (IMMs). These will go live on Monday 16 August 2010 which means that calculations based on the new IMMs, and hence communications with affected members, will be made on Friday 20 August with any relevant additional margin being called for value 24 August.

The new multipliers have been derived following consultation with members using the same approach as those implemented previously.

Approach to determining new IMMs

• In response to Member and Default Management Group (DMG) feedback LCH.Clearnet issued a member questionnaire to gauge swap market capacity. This included a survey of anticipated additional liquidity cost to close out positions over and above the perceived capacity for major currencies;

• LCH.Clearnet Risk Management used a model to measure this cost for actual portfolios and also to scale sensitivity up to Worst Case Loss (WCL) thresholds;

• Both the model and the approach have been endorsed by the SwapClear Default Management Group (DMG).

Application of IMMs

The IRS thresholds are largely unchanged compared to the previous year.  This year for the first time a multiplier matrix for OIS trades has been compiled, OIS trades have only been cleared by LCH.Clearnet since Q3 2009.  Please see tables below for details of the thresholds and key changes.  We have where possible ensured that there is a gradual accrual of additional margin. The results were presented and agreed with the DMG.

Initial Margin Multipliers aim to address anticipated additional liquidity cost to close out positions over and above the perceived market capacity. There are two distinct size thresholds:

- Worst case loss (WCL) during closeout of a single currency portfolio;

- Total initial margin requirement across all currency portfolios.

In the case of a portfolio consisting of a single currency, the multiplier derived from the single currency WCL thresholds in that currency will apply, not that derived from the Total Initial Margin Multiplier matrix.

Please click here to access the Initial Margin Multipliers

Please do not hesitate to contact the OTC IRD Risk team or Martin Hadfield if you require any further details.