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November 5, 2011

LCH publish details of the ForexClear service

LCH have published their self-certification document for ForexClear, submitted to the CFTC on Nov 4th. The original PDF is on this page, or click here to read the details. Page 342 onwards details the some of the ForexClear rules & regs, the document is black-lined (in blue), with the changes relevant to ForexClear.

Product coverage

  • USD / Chinese yuan
  • USD / Russian rouble
  • USD / Indian rupee
  • USD / South Korean won
  • USD / Chilean peso
  • USD / Brazilian real
All settled in USD, obviously.

Initial Margin

LCH.Clearnet generates initial margin requirements for ForexClear Contracts using “FXPaR” (Foreign Exchange Portfolio Analysis and Risk). FXPaR is a value-at-risk (VaR) model based on filtered historical simulation with volatility scaling. FxPAR is calculated on the basis of a five-day holding period and a confidence level of 99.76% consistent with LCH.Clearnet Board risk appetite. FXPaR was developed by LCH.Clearnet with considerable member input. Extract from the regs page 368, showing how an organisation who's rating falls soon finds themselves having to increase their IM amounts rapidly:

Rating Downgrades The Clearing House will, in the event of a ForexClear Clearing Member or its guarantor being downgraded to an average rating of below A in the relevant credit rating scale utilised by the Clearing House, apply a multiplier to that Clearing Member‟s initial margin requirement as calculated by the Clearing House. The initial margin multiplier shall be as follows: 110% for a Clearing Member downgraded to A- ; 200% for a Clearing Member downgraded to BBB+ ; and 250% for a Clearing Member downgraded to BBB. In the event that a Clearing Member is downgraded below BBB in that scale, the margin multiplier of 250% will continue to be applied, and the Clearing Member will be required to leave the service through the ForexClear Resignation Process and its authorisation to participate in that service will be withdrawn.

Opening Hours

The ForexClear service can accept trades for clearing from 20.00 local London time on Sunday night, through to 01.00 local London time on Saturday morning (ie 24 hours a day during that period)

Membership Criteria

Membership of the ForexClear service will be subject to criteria identical to LCH.Clearnet’s existing SwapClear membership criteria, with the exception that there will not be a requirement for a minimum portfolio size.

Default Fund

The Default Fund Rules provide for a segregated default fund. Rules F1-F5 set out the procedure for determining the size of the ForexClear default fund, and how it should be funded by FXCCMs. The minimum size of the ForexClear default fund is USD 70mm. At the end of every month, the default fund will be re-sized such that it is equal to the aggregate of the two largest stress testing losses in respect of ForexClear business incurred on each day over the preceding 30 days, plus 10%. FXCCMs’ contributions will be rebalanced so that they contribute amounts pro rata to their risk (measured by average initial margin) over the 30 day period. This is subject to a minimum contribution of USD 5mm per FXCCM. ForexClear default fund contributions will be made in USD cash and accounted for separately, but will be managed and invested alongside other USD cash in LCH.Clearnet’s liquidity portfolio.

Launch Date

Must be soon, hence the publication of the certificate.


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