Amendment to rules for payment arrangements

Further to our consultation on payment arrangements in June of this year. I am writing to you to inform you of the changes that we now intend to implement in our Rulebook on making and receiving cash payments.  We have received and taken on board comments made and confirm that the rule and procedure amendments listed below will be introduced with effect from 7th September 2012 subject to regulatory approval.

The main feedback from the consultation concerned the operational impact of EML, in particular in relation to the adequacy of current contingency arrangements.  Four members expressed opposing views and we have engaged actively with these members over recent weeks.  In order to respond to one of their concerns, we have added further clarity in s 3.2.1.11 which confirms that in the event of a PPS bank insolvency, LCH.Clearnet Ltd will seek to recover any funds that were on account in its name at the insolvent PPS bank.  Any recovery, after costs, will be returned to members in proportion to their share of the total.

A link to the CFTC submission for ‘amendment to the clearing house rules’ dated 17th August which incorporates the new rulebook is http://www.lchclearnet.com/Images/Amendment%20to%20procedures%20for%20accounts%20and%20payments_tcm6-62167.pdf.

1. The following new subsection (j) will be added to General Regulation 5: Accounts

“Where a payment has been made to the Clearing House by a Member through the PPS, that payment will only be credited to the account of the Member with the Clearing House if

(i) it is paid into an account of the Clearing House with an institution which is solvent,
(ii) that institution has performed its concentration function (being the transfer of net funds from the institution to a central account in the name of the Clearing House) and
(iii) that institution has made the relevant payments to other members on the date when the payment was due to be received by the Clearing House.”

2. The following equivalent change will be made to FCM Regulation 6 (subsection 6(j)), which apply to FCM members of LCH.Clearnet only:-

“Where a payment has been made to the Clearing House by an FCM Clearing Member through the PPS, that payment will only be credited to the account of the FCM Clearing Member with the Clearing House if

(i) it is paid into an account of the Clearing House with an institution which is solvent,
(ii) that institution has performed its concentration function (being the transfer of net funds from the institution to a central account in the name of the Clearing House) and
(iii) that institution has made the relevant payments to other members on the date when the payment was due to be received by the Clearing House.”

3. Section 3 of the Clearing House Procedures will be amended as follows.

“Subsection 3.2.1.3 Morning PPS Calls.

Clearing Members’ liabilities are calculated overnight. Should the relevant liability not be covered by acceptable forms of cover held by the Clearing House (see section 3.3) any shortfall is called through London PPS with separate calls made for each currency. It is the responsibility of each Clearing Member to ensure that its London PPS bank(s) meets all payment instructions received from the Clearing House. Confirmation of payments, as notified, must be received by the Clearing House from the relevant PPS bank(s) by 09:00, or within one hour of a subsequent call, on the day on which the PPS Call is made. Payments will only be recognized for this purpose if the relevant PPS bank

(i) has performed its concentration function (being the transfer of net funds from the PPS bank to a central account in the name of the Clearing House)
(ii) has made such payments, and
(iii) any time permitted by the relevant payment settlement system for the recall of any such payment has expired.

Where payments are due to a Clearing Member, Payments will be recognized as soon as payment instructions in respect of that payment have been given to a PPS bank. For this purpose, a payment instruction will only be recognised to the extent that the Clearing House has taken steps to transfer to the PPS bank any such sums as may be necessary to enable that payment instruction to be performed by the PPS bank.”

The following new subsection 3.2.1.11 will be added to make clear that LCH.Clearnet will seek to recover any funds that were on an account in its name at an insolvent PPS bank.

“3.2.1.11. Recovery from insolvent PPS Banks

In the event that payment is not completed by the relevant PPS bank, due to insolvency and not a technical failure, and the affected Clearing Member(s) make alternative payments, the Clearing House, should it make a recovery from the estate of the PPS bank, will credit such recovery, net of costs, to the accounts of the affected Clearing Members in proportion to the amount of the original missed payment.”

Equivalent changes will be made to the FCM Procedures, which apply to FCMs only.

Should you have any comments or questions they should be addressed to Stephen Lloyd whose contact details are indicated below.

E-mail: [email protected]  
Tel : +44 207 426 7161

Christopher Jones,
Chief Risk Officer, LCH.Clearnet Limited