All LCH.Clearnet EnClear Clearing Members -  Changes Related to Dodd Frank and LSOC

1. LCH.Clearnet Ltd (“LCH”), a Recognised Clearing House regulated by the Financial Services Authority (“FSA”) and a Derivatives Clearing Organisation (“DCO”) registered with the Commodity Futures Trading Commission (“CFTC”), is planning to implement changes to its EnClear services as a result of regulatory changes that have been prescribed in the United States by the CFTC which is designed to protect cleared swaps customer collateral and contracts. CFTC Rules require that Legally Segregated, Operationally Commingled (“LSOC”) changes become effective by 8 November 2012.

2. Initial Margin (“IM”) Requirement

A review of the margin assumption has been undertaken in light of the CFTC Bankruptcy rules (Part 190). The timeline prescribed by the rules requires a longer window to manage client porting in event of a Futures Commission Merchant (“FCM”) default.  For EnClear FCM clients only, the holding period assumption for margin calculation will therefore be changed from two business days to seven business days. This will be implemented via a simplified scaling approach on a portfolio basis.

EnClear will provide the daily end of day IM report (MBRDIM.CSV) as per normal, however FCMs will also have the breakdown per client account in the report and FCM IM will be reported as a new field. Please click here to see a sample report.

3. Non-Hedger Mark-up

With the FCM model in place for EnClear, one of the items required to be addressed under the Dodd Frank regulations is for the FCMs to place a mark-up on the Initial Margin called on their Non-Hedger clients. This mark-up is set at 10% above the portfolios IM.  It will be the responsibility of the FCM to collect this add-on from their Non-Hedger clients. The add-on received from the Non-Hedger clients will be held with the FCMs and not with LCH, and the clearing house will only collect the Initial Margin charged to the FCM as per the norm.
LCH will publish the marked up values in the daily end of day IM report (MBRDIM.CSV) as “Non-hedger IM” at client level (Position Account level in ECS).

4. In addition to the end of day IM report, an intra-day IM report will also be made available to members.

5. The changes to the IM report will be implemented for 5 November 2012.

6. For further information please contact the following:

Risk Operations +44 (0)20 7426 7520
Nicholas Lincoln
Director, Market Risk