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Company Circular No:LCH.Clearnet Ltd Circular No 3275
Date:27 March 2013
To:All EnClear and Exchange Clearing Members

Restructuring of the LCH.Clearnet Ltd. General Default Fund and associated default management processes

I am contacting you to provide an overview of important changes that LCH.Clearnet Ltd (LCH.Clearnet) intends to introduce to its Equities, Commodities and Listed Derivatives businesses over the coming period.

Over the last year stand-alone SwapClear and RepoClear default funds were created by separating them from the general default fund. It is our intention to restructure the remaining general default fund by dividing it into three product specific default funds: a commodities fund, a listed interest rate derivatives fund and an equities and equity derivatives fund. In order to carry out this default fund ‘re-strike’ LCH.Clearnet requires member approval in a ballot, which is anticipated to be before the end of Q2 2013.

There is growing demand from regulators and other stakeholders to augment default management practices at systemically important institutions such as LCH.Clearnet. Much of the emphasis has been on preventing contagion from potential losses in one asset class from spreading to other asset classes and on ensuring the ability of the central counterparty to survive following such a loss.

The re-strike will strengthen the default management waterfall and subsequent processes around the handling of latent risk, service continuity and service closure. At the same time consideration will be placed on appropriate sizing of each of the proposed stand-alone default funds that we intend to create. All of the measures will ensure the highest risk standards, thus providing a resilient default management waterfall that will assist us in complying with the expected new recognition requirements.

During this re-strike we are planning to:

  1. Make changes to our rules, on an interim basis, covering invoicing back. We will be writing separately on this with more detail.
  2. As with other LCH services, we will be introducing procedures for calling additional margin to cover stress loss above initial margin which is greater than 45% of the default fund size.
  3. We also intend to enhance the risk framework further by ensuring additional risks (wrong way risk, concentration and liquidation risk) are captured appropriately.

Over the coming weeks running up to the ballot we will be discussing the detail of proposed changes with of our members.

Should you have any questions please contact your usual LCH.Clearnet representative.

Alberto Pravettoni
CEO Repo and Exchanges