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Company Circular No:LCH.Clearnet Ltd Circular No 3220
Date:05 November 2012
To:All SwapClear and EnClear clearing members

LSOC implementation – Guidance for FCM Clearing Members

Further to the member circular of November 1st 2012 LCH.Clearnet Limited (LCH.Clearnet) is writing to provide further guidance for FCM Clearing Members in advance of its implementation of Part 22 of the CFTC’s rules (LSOC), which is now scheduled for November 13th 2012 for payments made on the morning of November 14th.

In order to permit FCM Clearing Members to comply with Part 22 of the CFTC Rules, LCH.Clearnet will make the following changes to its margin call process for FCM Clearing Members.  This change is being introduced as a direct result of the CFTC’s requirement that FCM Clearing Members perform the ‘LSOC Compliance Calculation’ prior to meeting a DCO’s margin call.

End of Day Margin Settlement

FCM Clearing Members are required to meet end of day margin calls by 9:00am (GMT) each morning.  The call is met via LCH.Clearnet’s Protected Payment System (PPS) process whereby the Cleared Swaps Customer Account (known in the LCH.Clearnet rulebook as the ‘FCM Swaps Client Segregated Depository Account’) of an FCM Clearing Member is debited, pursuant to a SWIFT MT-204 instruction.  Currently, LCH.Clearnet delivers the debit instruction to an FCM Clearing Member’s nominated PPS Account at approximately 1:00am (GMT) each day.  FCM Clearing Members are not required to meet the margin call until 9:00am (GMT).  Commencing on November 14th, LCH.Clearnet will release the SWIFT debit instruction to an FCM Clearing Member’s PPS bank between 7:55am (GMT) and 8:00am (GMT)  

As is the case today and in accordance with the rulebook, FCM Clearing Members will still be responsible for making payment by 9:00am (GMT), regardless of when the PPS instruction is delivered to the PPS bank by LCH.Clearnet.

Intra-day Margin Settlement

FCM Clearing Members are required to meet intra-day margin calls within 1 hour of notification that a payment is due.  From the morning of November 14th, LCH.Clearnet will notify an FCM Clearing Member of an intra-day margin call via telephone and email. Following receipt of this notification, FCM Clearing Members must confirm to LCH.Clearnet whether they will be meeting the call through the delivery of securities or through debiting their PPS Account.  If an FCM Clearing Member chooses to meet the call with securities, the FCM Clearing Member must deliver such securities within one hour of the original notification.  If an FCM Clearing Member chooses to have its PPS Account debited, LCH.Clearnet will ask the FCM Clearing Member to notify it once it is ready for the PPS Account to be debited.  Once the FCM Clearing Member notifies LCH.Clearnet that it is ready for the cash to be debited, an instruction will be sent to the FCM Clearing Member’s PPS bank. Regardless of the method of funding, the FCM Clearing Member is obligated to meet the call within 1 hour of the original notification.  To be clear, and by way of example, if LCH.Clearnet requires an FCM Clearing Member to meet a margin call at 11:00am (EST), and the FCM Clearing Member notifies LCH.Clearnet at 11:30am (EST) that it is ready for its PPS debit instruction, the FCM Clearing Member will have only 30 minutes to deliver the funds to LCH.Clearnet. The last margin call that this process applies to begins at 8:00pm (GMT).

Return of Unallocated Excess and FCM Buffer:

From the morning of November 14th, FCM Clearing Members will no longer have the option to have excess margin held with respect to an FCM Clearing Member’s client account automatically returned (the facility known as auto-repay). In accordance with the rulebook (as amended), FCM Clearing Members must notify LCH.Clearnet when they wish to have Unallocated Excess or FCM Buffer returned.

Cleared Swaps Customer Accounts:

As of November 14th 2012, all client collateral, both cash and non-cash, held with respect to Cleared Swaps Customers (i.e. customers of FCM Clearing Members clearing on both the SwapClear and EnClear services) will be kept in a 4(d)(f) account by LCH.Clearnet. In accordance with Part 22 of the CFTC Regulations, FCM Clearing Members must also ensure that collateral is held in appropriate accounts and that instructions used by LCH.Clearnet to debit and credit such accounts relate to Cleared Swaps Customer (4(d)(f)) Accounts, in accordance with the rulebook and applicable law.

Contacts Details for Notifications

In order to comply with the above and the rulebook of LCH.Clearnet, FCM Clearing Members should provide contact details to LCH.Clearnet of the person and department to which notifications should be made. Please send email and telephone details, along with alternative contacts who should be notified at different times throughout the day,  to the LCH.Clearnet Treasury Operations team at:

[email protected] or phone on +44 (0) 207 426 7505 or (212) 513 5642.

LCH.Clearnet’s implementation of LSOC remains subject to regulatory approval.

If you have any questions in the interim, please do not hesitate to contact LCH.Clearnet Compliance at [email protected] or [email protected]