LCH Group Fixed Income Margin (RepoClear)

January 20, 2013 by Bill Hodgson 5 Comments

LCH has published a PDF explaining the framework for managing risk over and above IM for their RepoClear service. It includes factors such as Concentration Risk, Sovereign Credit Risk, “Wrong Way” Risk and others. Short and interesting.

LCH.Clearnet Group – Member Notices – Circulars – 2013-01-18 Group Fixed Income Margin.

Central Counter Party, Credit risk, LCH.Clearnet

RepoClear

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5 Responses to “LCH Group Fixed Income Margin (RepoClear)”

carlarweir January 20, 2013 at 15:06

Reblogged this on Carl A R Weir's Blog.
flintspark1 January 24, 2013 at 20:17

Is there a reason why LCH is not pursuing portfolio margining across RepoClear and SwapClear? Is it because reconciling different IM methods as outlined here would be difficult to pull off given some elements only apply to repo and not OTC?
Bill Hodgson January 24, 2013 at 22:56

I don’t know the reason but I wonder what the most urgent priorities are for RepoClear & SwapClear? For the latter I would think product expansion more important than a combined margin pot with RepoClear.

Achieving cross margining would mean a combined default process, default find and legal framework amongst other things, not simple.
flintspark1 January 25, 2013 at 14:52

I agree cross-margining is not simple. However, not as hard as all that. After all CME has figured it out well enough to bring it to market (albeit for futures vs. OTC and albeit maybe not perfect). Essentially you have to pick which waterfall the crossmargining would exist in (presumably the more expensive IM one which I presume is the OTC waterfall). Then expand the IM calculation to include repo positions netted with OTC trades. Then build the Ops process to enable elective repo position transfers between the repo clearing account and the OTC clearing account and then build the IT plumbing to automate.

Product expansion I would imagine is not a strong priority given considerable lead over CME in that department. CME on the other hand has a considerable lead in futures vs. swaps portfolio margining which is actually most attractive to banks and hedgies because they’re the ones trading both products heavily. Likewise banks and hedgies are the ones trading and hedging both repos and OTC heavily.

The clincher for me is that repos tend to be longer term products and therefore have a bigger neutralizing potential on the long end of the curve which is the most expensive in IM terms.

They could readily advance this approach both with Repo clear in Europe and DTCC via NYPC in the US,
Bill Hodgson January 25, 2013 at 15:16

Perhaps their commitment to work with NYPC is their effort on cross-product. Sandy Broderick the CEO has a long history of involvement with LCH.