Default Fund - Summary

A new guarantee model

The merger of the central counterparties of the Amsterdam, Brussels and Paris markets into LCH.Clearnet SA has been technically terminated in April 2004 with the Lisbon derivatives migration into the Deivatives Clearing System. At this occasion, the structure of the financial resources of LCH.Clearnet SA has reached its objective of rationalisation. The Clearing House's credibility and the efficiency of its guarantees ultimately depend on these resources.

As a reminder, in response to challenges raised by the enlarged scope of its activities and its European development prospects, the mutual guarantee funds have been harmonised and extended. LCH.Clearnet SA's approach is to combine the principles applied hitherto for the main types of markets cleared :

• The Euronext Amsterdam, Brussels, Lisbon and Paris cash and derivatives regulated markets,

• The Bonds & Repos markets, whose transactions come either from ECN's (such as Brokertec, MTS France, Viel-Prominofi...) or from MTS Italy which is a recognised regulated market in Italy.

These principles include sharing risks, not covered by individual guarantee, between members by means of dedicated mutual guarantee funds, which will be available to LCH.Clearnet SA to cover the default of a clearing member. The extension to all clearing members of a compulsory contribution to a mutual guarantee fund reassessed on a monthly basis provides a more flexible way of tailoring total financial resources to actual risks providing LCH.Clearnet SA with a safety buffer in case of a member's default that complements the existing Equity capital.

The costs associated with the collateral deposits in the mutual guarantee funds have been neutralised.

Why mutual guarantee funds?

The individual initial margin and margin calls paid by members only cover part of the risk. Indeed, they are based on a scenario of normal market fluctuations, which does not take into account more extreme market movements generating losses that would not be covered. Calibrating margin parameters on extreme historical market movements would cost significant additional margins to each clearing member.
The mutual guarantee system may provide sufficient financial resources at a lower cost for all the membership community and is more versatile, because it may be readjusted periodically to reflect actual market risks.
Risks not covered by initial margin and daily margin calls are therefore covered by :

• Mutual Guarantee Funds.

• LCH.Clearnet SA Equity capital (Tier 1 and Tier 2).

The first contribution to the mutual guarantee fund was called :

• On April 17, 2002 for the Euronext cash (securities) and derivatives regulated markets.

• On March 24, 2003 for the Bonds & Repos markets.

The principles underpinning the calculation of both LCH.Clearnet SA mutual guarantee funds are the same. The collective provision needs to be sufficient to cover the potential failure of LCH.Clearnet SA's largest clearing member, defined as the member whose risk exposure after dedusction of its individual initial margin and margin calls in the highest.

The size of each member's contribution is assessed by LCH.Clearnet SA every month and is based on the relative weight of each member's specific uncovered risk compared to the total sum of the uncovered risk of all the member's. Each member makes therefore a contribution to the mutual guarantee fund un proportion to its share of total risk on a previous period of 60 days.

See Instruction on Financial Resources:

IV.5-1

See Default Fund Instructions:

IV.3-1 & IV.3-2