For some reason there are people out there who keep googling T2 and T4 and hitting my blog. To satisfy their curiosity, here’s what there is to know.
The T2 model is now the only way trades are booked in SwapClear. This means a client trade is booked into a client account, facing LCH, and the counterparty trade is booked into their house account, like this:
Client <-> Clearing Broker <-> LCH (in the client account)
Counterparty <-> LCH (in their house account)
So end result is: Client <-> CB <-> LCH <-> Counterparty
You can see there’s two swaps (sides) with LCH in the middle, so this is the Trade x 2 model, or T2. (The trade from Client to CB is outside clearing and subject to a normal ISDA and CSA).
The T4 model is no longer used, it was an invention to serve a purpose and for completeness looked like this:
Client -> Clearing Broker -> LCH (Client account)
Clearing Broker <- LCH (House account)
Clearing Broker -> LCH (House account)
LCH -> Counterparty (House account)
The reason for the design was to insulate the counterparty from a client defaulting, or wanting to tear-up the trade. It was complex, and given the new netting function in SwapClear was made redundant.