More one-pot margining ideas: LCH in the US and Liffe on ICE Clear Europe

Two developments occurred yesterday that could push the idea of one-pot margining in the US and Europe. This is important stuff: the more that CCP collateral pools can consolidate, the less new collateral the world will need for cleared OTC derivatives. Since the current estimate is US$1 trillion in new collateral, changes here could be significant.

Here’s the news that has been released:

From LCH.Clearnet: “LCH.Clearnet Group Limited (LCH.Clearnet), the multi-national clearing house, today announced that its US-based entity LCH.Clearnet LLC launched a US-domiciled interest rate swap clearing service. This new service expands SwapClear’s market-leading interest rate swap offering and demonstrates the importance of the US to LCH.Clearnet’s geographic expansion strategy.

“SwapClear’s US-domiciled service leverages its global platform which clears over 90% of cleared interest rate swaps for buyside clients. The new service will mirror SwapClear’s existing product range, risk management, technology and operational platform. Headquartered in New York City, the new service is governed by New York law and regulated by the CFTC.”

From NYSE Liffe: “NYSE Liffe, the derivatives division of NYSE Euronext and ICE Clear Europe, a wholly-owned subsidiary of IntercontinentalExchange, today announced plans to begin clearing the London-based derivatives market of NYSE Liffe on Monday, July 1, 2013, following successful testing with Clearing Members in recent weeks.

“ICE Clear Europe was established in 2008 as the first new clearing house in the UK for over 100 years and at launch, transitioned more than US $16.5 billion initial margin and 26 million energy contracts from LCH.Clearnet to ICE Clear Europe. Today, ICE Clear Europe has 69 members and provides multi-asset clearing services for energy and credit derivatives.”

Here’s what we see going on: LCH is now making more aggressive moves to capture US market share away from CME. In doing so, this sets up the possibility that the 10 big firms that are now signed up to the US clearing service could, possibly, potentially, be able to cross-margin their activities with LCH.Clearnet in Europe for Interest Rate Swaps (IRS) against their US activities. This is not assumed in any way as national jurisdictions will cause a problem. But it opens up the doors. We think this is substantively different than SwapClear’s participation in NY Portfolio Clearing’s One Pot margining model since a clearing member doesn’t need to sign up to a separate service; they can cross-margin everything through LCH.Clearnet directly.

Meanwhile, NYSE Liffe’s move as part of the ICE purchase inches closer to a possible cross-margning pot for Interest Rate Derivatives and Credit Default Swaps (CDS). This is something that the industry would like to see as it opens up a greater possible (though in no way certain) likelihood of cross-margining positions that are more than one directional in terms of market movements. Many end-user IRS traders we have spoken to said that portfolio margining from clearing brokers doesn’t seem that exciting to them given the fact that their IRS books go one way on interest rate risk. But, add in CDS and the story gets more interesting for some of these firms. Again, there are issues: ICE Clear Credit is one of ICE’s four CCPs, which we understand are not cross-capabible themselves at this time. But this is a step forward.

We think that the LCH and ICE moves are good steps for general industry consolidation of collateral pools. There are still many miles to go, but if each individual firm can sort out its own clearing members, then perhaps come together in one pot across all of their many different CCPs, then the collateral savings could be very significant.

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