Rmo webinar sep 28 solwip copy

305 views

Published on

Published in: Design
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
305
On SlideShare
0
From Embeds
0
Number of Embeds
1
Actions
Shares
0
Downloads
4
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide
  • The following presentation covers the robust approach to risk management taken at LCH.Clearnet’s SwapClear interest rate swap clearing service. Underlying the core principles is a ‘defaulter pays’ philosophy, which permeates the risk management thinking across LCH.Clearnet.\nWe will look at the dynamic risk management approach that LCH.Clearnet takes, including actively engaging in intraday calls. And we will review how LCH.Clearnet ensures that the firms that are taking the risks are those that are covering the risk.\n
  • The information contained in this presentation relates only to the SwapClear service offered by LCH.Clearnet Limited and does not necessarily apply to the SwapClear US service.\n
  • \n
  • Indeed, the key objective of LCH.Clearnet is to provide a central counterparty of the highest quality that protects the interests of the company’s clearing members and clients.\n
  • Indeed, the key objective of LCH.Clearnet is to provide a central counterparty of the highest quality that protects the interests of the company’s clearing members and clients.\n
  • Indeed, the key objective of LCH.Clearnet is to provide a central counterparty of the highest quality that protects the interests of the company’s clearing members and clients.\n
  • Indeed, the key objective of LCH.Clearnet is to provide a central counterparty of the highest quality that protects the interests of the company’s clearing members and clients.\n
  • Indeed, the key objective of LCH.Clearnet is to provide a central counterparty of the highest quality that protects the interests of the company’s clearing members and clients.\n
  • Indeed, the key objective of LCH.Clearnet is to provide a central counterparty of the highest quality that protects the interests of the company’s clearing members and clients.\n
  • Indeed, the key objective of LCH.Clearnet is to provide a central counterparty of the highest quality that protects the interests of the company’s clearing members and clients.\n
  • Indeed, the key objective of LCH.Clearnet is to provide a central counterparty of the highest quality that protects the interests of the company’s clearing members and clients.\n
  • The same fiduciary responsibilities exist at SwapClear, which implemented a number of risk management practices in conjunction with recent moves by the CFTC to broaden membership of clearinghouses.\n
  • The same fiduciary responsibilities exist at SwapClear, which implemented a number of risk management practices in conjunction with recent moves by the CFTC to broaden membership of clearinghouses.\n
  • The same fiduciary responsibilities exist at SwapClear, which implemented a number of risk management practices in conjunction with recent moves by the CFTC to broaden membership of clearinghouses.\n
  • The same fiduciary responsibilities exist at SwapClear, which implemented a number of risk management practices in conjunction with recent moves by the CFTC to broaden membership of clearinghouses.\n
  • The same fiduciary responsibilities exist at SwapClear, which implemented a number of risk management practices in conjunction with recent moves by the CFTC to broaden membership of clearinghouses.\n
  • The same fiduciary responsibilities exist at SwapClear, which implemented a number of risk management practices in conjunction with recent moves by the CFTC to broaden membership of clearinghouses.\n
  • \n
  • The primary risk that every clearinghouse is looking to protect its members and participants against is a default.\n
  • The primary risk that every clearinghouse is looking to protect its members and participants against is a default.\n
  • The primary risk that every clearinghouse is looking to protect its members and participants against is a default.\n
  • The primary risk that every clearinghouse is looking to protect its members and participants against is a default.\n
  • The primary risk that every clearinghouse is looking to protect its members and participants against is a default.\n
  • The primary risk that every clearinghouse is looking to protect its members and participants against is a default.\n
  • The primary risk that every clearinghouse is looking to protect its members and participants against is a default.\n
  • The primary risk that every clearinghouse is looking to protect its members and participants against is a default.\n
  • The primary risk that every clearinghouse is looking to protect its members and participants against is a default.\n
  • \n
  • SwapClear has a well-tested process for managing the remaining positions of the defaulting member in the case of a collapse\n\n The Default Management Group – which consists of market participants and SwapClear and LCH management – meets and, as a first step, quickly offsets the largest risks in the marketplace.\nThere are then processes in place to effectively auction off the remaining positions – by currency. \n
  • In the Lehman case, SwapClear and LCH.Clearnet successfully neutralized a nine trillion dollar interest rate swap portfolio, consisting of tens of thousands of trades in five currencies using only 35% of Lehman’s initial margin across all assets cleared at LCH.Clearnet.\n
  • As we shall see shortly, the initial margin is the first of many levels of defense for the clearinghouse against default risk and represents the up-front collateral posted against a position.\n
  • As we shall see shortly, the initial margin is the first of many levels of defense for the clearinghouse against default risk and represents the up-front collateral posted against a position.\n
  • \n
  • At LCH.Clearnet there are a set of guiding principles that dictate our approach to risk management and which are reflected in the default waterfall. \nMost important is the principle that the defaulter pays first to ensure that the losses remain remote and kept to a minimum across non-defaulting members. \n
  • At LCH.Clearnet there are a set of guiding principles that dictate our approach to risk management and which are reflected in the default waterfall. \nMost important is the principle that the defaulter pays first to ensure that the losses remain remote and kept to a minimum across non-defaulting members. \n
  • At LCH.Clearnet there are a set of guiding principles that dictate our approach to risk management and which are reflected in the default waterfall. \nMost important is the principle that the defaulter pays first to ensure that the losses remain remote and kept to a minimum across non-defaulting members. \n
  • At LCH.Clearnet there are a set of guiding principles that dictate our approach to risk management and which are reflected in the default waterfall. \nMost important is the principle that the defaulter pays first to ensure that the losses remain remote and kept to a minimum across non-defaulting members. \n
  • At LCH.Clearnet there are a set of guiding principles that dictate our approach to risk management and which are reflected in the default waterfall. \nMost important is the principle that the defaulter pays first to ensure that the losses remain remote and kept to a minimum across non-defaulting members. \n
  • At LCH.Clearnet there are a set of guiding principles that dictate our approach to risk management and which are reflected in the default waterfall. \nMost important is the principle that the defaulter pays first to ensure that the losses remain remote and kept to a minimum across non-defaulting members. \n
  • At LCH.Clearnet there are a set of guiding principles that dictate our approach to risk management and which are reflected in the default waterfall. \nMost important is the principle that the defaulter pays first to ensure that the losses remain remote and kept to a minimum across non-defaulting members. \n
  • At LCH.Clearnet there are a set of guiding principles that dictate our approach to risk management and which are reflected in the default waterfall. \nMost important is the principle that the defaulter pays first to ensure that the losses remain remote and kept to a minimum across non-defaulting members. \n
  • While the defaulter pays first, all members of the clearinghouse are involved in underwriting the overall risk, and those that introduce risk to the CCP must be prepared to underwrite it on both a financial and process standpoint.\n
  • While the defaulter pays first, all members of the clearinghouse are involved in underwriting the overall risk, and those that introduce risk to the CCP must be prepared to underwrite it on both a financial and process standpoint.\n
  • While the defaulter pays first, all members of the clearinghouse are involved in underwriting the overall risk, and those that introduce risk to the CCP must be prepared to underwrite it on both a financial and process standpoint.\n
  • While the defaulter pays first, all members of the clearinghouse are involved in underwriting the overall risk, and those that introduce risk to the CCP must be prepared to underwrite it on both a financial and process standpoint.\n
  • While the defaulter pays first, all members of the clearinghouse are involved in underwriting the overall risk, and those that introduce risk to the CCP must be prepared to underwrite it on both a financial and process standpoint.\n
  • While the defaulter pays first, all members of the clearinghouse are involved in underwriting the overall risk, and those that introduce risk to the CCP must be prepared to underwrite it on both a financial and process standpoint.\n
  • While the defaulter pays first, all members of the clearinghouse are involved in underwriting the overall risk, and those that introduce risk to the CCP must be prepared to underwrite it on both a financial and process standpoint.\n
  • While the defaulter pays first, all members of the clearinghouse are involved in underwriting the overall risk, and those that introduce risk to the CCP must be prepared to underwrite it on both a financial and process standpoint.\n
  • There is an understanding with our members that good participation in the default management process should be rewarded, as participation in auction portfolios, etc is incentivized. With the rewards for good participation comes penalties for apathy or inactivity when it comes to the default management process.\n
  • There is an understanding with our members that good participation in the default management process should be rewarded, as participation in auction portfolios, etc is incentivized. With the rewards for good participation comes penalties for apathy or inactivity when it comes to the default management process.\n
  • There is an understanding with our members that good participation in the default management process should be rewarded, as participation in auction portfolios, etc is incentivized. With the rewards for good participation comes penalties for apathy or inactivity when it comes to the default management process.\n
  • There is an understanding with our members that good participation in the default management process should be rewarded, as participation in auction portfolios, etc is incentivized. With the rewards for good participation comes penalties for apathy or inactivity when it comes to the default management process.\n
  • There is an understanding with our members that good participation in the default management process should be rewarded, as participation in auction portfolios, etc is incentivized. With the rewards for good participation comes penalties for apathy or inactivity when it comes to the default management process.\n
  • There is an understanding with our members that good participation in the default management process should be rewarded, as participation in auction portfolios, etc is incentivized. With the rewards for good participation comes penalties for apathy or inactivity when it comes to the default management process.\n
  • There is an understanding with our members that good participation in the default management process should be rewarded, as participation in auction portfolios, etc is incentivized. With the rewards for good participation comes penalties for apathy or inactivity when it comes to the default management process.\n
  • There is an understanding with our members that good participation in the default management process should be rewarded, as participation in auction portfolios, etc is incentivized. With the rewards for good participation comes penalties for apathy or inactivity when it comes to the default management process.\n
  • There is an understanding with our members that good participation in the default management process should be rewarded, as participation in auction portfolios, etc is incentivized. With the rewards for good participation comes penalties for apathy or inactivity when it comes to the default management process.\n
  • There is an understanding with our members that good participation in the default management process should be rewarded, as participation in auction portfolios, etc is incentivized. With the rewards for good participation comes penalties for apathy or inactivity when it comes to the default management process.\n
  • There is an understanding with our members that good participation in the default management process should be rewarded, as participation in auction portfolios, etc is incentivized. With the rewards for good participation comes penalties for apathy or inactivity when it comes to the default management process.\n
  • There is an understanding with our members that good participation in the default management process should be rewarded, as participation in auction portfolios, etc is incentivized. With the rewards for good participation comes penalties for apathy or inactivity when it comes to the default management process.\n
  • There is an understanding with our members that good participation in the default management process should be rewarded, as participation in auction portfolios, etc is incentivized. With the rewards for good participation comes penalties for apathy or inactivity when it comes to the default management process.\n
  • \nMember responsibilities are to be clear, simple and explicit for all eventualities to create certainty, simplicity and transparency within members’ activity.\n
  • \nMember responsibilities are to be clear, simple and explicit for all eventualities to create certainty, simplicity and transparency within members’ activity.\n
  • \nMember responsibilities are to be clear, simple and explicit for all eventualities to create certainty, simplicity and transparency within members’ activity.\n
  • \nMember responsibilities are to be clear, simple and explicit for all eventualities to create certainty, simplicity and transparency within members’ activity.\n
  • \nMember responsibilities are to be clear, simple and explicit for all eventualities to create certainty, simplicity and transparency within members’ activity.\n
  • \nMember responsibilities are to be clear, simple and explicit for all eventualities to create certainty, simplicity and transparency within members’ activity.\n
  • There is a global default management process with regional applications, where required by regulators or the marketplace. This is most efficient from a collateral, financial, and default process standpoint.\n
  • There is a global default management process with regional applications, where required by regulators or the marketplace. This is most efficient from a collateral, financial, and default process standpoint.\n
  • There is a global default management process with regional applications, where required by regulators or the marketplace. This is most efficient from a collateral, financial, and default process standpoint.\n
  • There is a global default management process with regional applications, where required by regulators or the marketplace. This is most efficient from a collateral, financial, and default process standpoint.\n
  • There is a global default management process with regional applications, where required by regulators or the marketplace. This is most efficient from a collateral, financial, and default process standpoint.\n
  • \nIt is a guiding principle that all members have limited liability to the CCP, so banks’ exposures to central counterparties are capped. It is also understood that capital at risk to the CCP should be proportionate to the risk that they introduced to the CCP and system.\n
  • \nIt is a guiding principle that all members have limited liability to the CCP, so banks’ exposures to central counterparties are capped. It is also understood that capital at risk to the CCP should be proportionate to the risk that they introduced to the CCP and system.\n
  • \nIt is a guiding principle that all members have limited liability to the CCP, so banks’ exposures to central counterparties are capped. It is also understood that capital at risk to the CCP should be proportionate to the risk that they introduced to the CCP and system.\n
  • \nIt is a guiding principle that all members have limited liability to the CCP, so banks’ exposures to central counterparties are capped. It is also understood that capital at risk to the CCP should be proportionate to the risk that they introduced to the CCP and system.\n
  • \nIt is a guiding principle that all members have limited liability to the CCP, so banks’ exposures to central counterparties are capped. It is also understood that capital at risk to the CCP should be proportionate to the risk that they introduced to the CCP and system.\n
  • \nIt is a guiding principle that all members have limited liability to the CCP, so banks’ exposures to central counterparties are capped. It is also understood that capital at risk to the CCP should be proportionate to the risk that they introduced to the CCP and system.\n
  • It is also understood that capital at risk to the CCP should be proportionate to the risk that they introduced to the CCP and system.\n
  • It is also understood that capital at risk to the CCP should be proportionate to the risk that they introduced to the CCP and system.\n
  • It is also understood that capital at risk to the CCP should be proportionate to the risk that they introduced to the CCP and system.\n
  • It is also understood that capital at risk to the CCP should be proportionate to the risk that they introduced to the CCP and system.\n
  • Finally, we firmly believe that the clearinghouse should maximize client porting opportunities to back regulator’s clearing solutions and initiatives. \n
  • Finally, we firmly believe that the clearinghouse should maximize client porting opportunities to back regulator’s clearing solutions and initiatives. \n
  • Finally, we firmly believe that the clearinghouse should maximize client porting opportunities to back regulator’s clearing solutions and initiatives. \n
  • Finally, we firmly believe that the clearinghouse should maximize client porting opportunities to back regulator’s clearing solutions and initiatives. \n
  • Finally, we firmly believe that the clearinghouse should maximize client porting opportunities to back regulator’s clearing solutions and initiatives. \n
  • Finally, we firmly believe that the clearinghouse should maximize client porting opportunities to back regulator’s clearing solutions and initiatives. \n
  • Finally, we firmly believe that the clearinghouse should maximize client porting opportunities to back regulator’s clearing solutions and initiatives. \n
  • \n
  • Here are some basic definitions of expressions used in this presentation. \nThe default fund is the member contributed fund used to provide another layer of protection in the default waterfall. Members contribute a minimum of 10 million pounds, and the total fund size has a floor of one billion pounds and a cap of five billion pounds. In SwapClear’s new US service the default fund contribution and calculation method will be similar, however it will be denominated in the US dollar.\n\n
  • Initial margin is the collateral posted when a trade is first cleared. This is adjusted when additional trades are added to the portfolio, often changing the risk characteristics.\n\n
  • Variation margin is the change in margin to reflect market movements as well as coupon payments.\n
  • LSOC is already used as an option in Europe and will be mandatory in the U.S. under CFTC rules\nIt is a client account structure in which accounts are legally segregated in the books and records of the FCM and the clearing house, but are operationally commingled\n
  • PAI is the Price Adjustment Interest paid and received on a position’s net present value. To deduce the received PAI on a portfolio\nSwapClear subtracts the NPV from paid PAI. SwapClear calculates PAI at the overnight rate (the overnight rate that corresponds to the trade currency) on the NPV balance\n
  • PAI is the Price Adjustment Interest paid and received on a position’s net present value. To deduce the received PAI on a portfolio\nSwapClear subtracts the NPV from paid PAI. SwapClear calculates PAI at the overnight rate (the overnight rate that corresponds to the trade currency) on the NPV balance\n
  • The guiding principles are most clearly seen in the default waterfall \n\nThis is the hierarchy of protection in the case of default, and there are carefully considered policies and procedures in place at each level to protect stakeholders. \n
  • In the extreme event that the SwapClear default fund is still not sufficient to cover losses, there are other mechanisms in place – but we will not go into those here.\n\n\n
  • In the extreme event that the SwapClear default fund is still not sufficient to cover losses, there are other mechanisms in place – but we will not go into those here.\n\n\n
  • In the extreme event that the SwapClear default fund is still not sufficient to cover losses, there are other mechanisms in place – but we will not go into those here.\n\n\n
  • In the extreme event that the SwapClear default fund is still not sufficient to cover losses, there are other mechanisms in place – but we will not go into those here.\n\n\n
  • In the extreme event that the SwapClear default fund is still not sufficient to cover losses, there are other mechanisms in place – but we will not go into those here.\n\n\n
  • In the extreme event that the SwapClear default fund is still not sufficient to cover losses, there are other mechanisms in place – but we will not go into those here.\n\n\n
  • In the extreme event that the SwapClear default fund is still not sufficient to cover losses, there are other mechanisms in place – but we will not go into those here.\n\n\n
  • In the extreme event that the SwapClear default fund is still not sufficient to cover losses, there are other mechanisms in place – but we will not go into those here.\n\n\n
  • In the extreme event that the SwapClear default fund is still not sufficient to cover losses, there are other mechanisms in place – but we will not go into those here.\n\n\n
  • In the extreme event that the SwapClear default fund is still not sufficient to cover losses, there are other mechanisms in place – but we will not go into those here.\n\n\n
  • In the extreme event that the SwapClear default fund is still not sufficient to cover losses, there are other mechanisms in place – but we will not go into those here.\n\n\n
  • In addition to the default waterfall, there are account-specific protections in place for clients. The protection of client assets is at the core of the value proposition provided by a clearinghouse.\n
  • When a buy-side client submits a trade through its clearing broker (or CB\n
  • When a buy-side client submits a trade through its clearing broker (or CB\n
  • When a buy-side client submits a trade through its clearing broker (or CB\n
  • When a buy-side client submits a trade through its clearing broker (or CB\n
  • the positions and margins are held in segregated client accounts within the CB’s house account with LCH.Clearnet. This is to protect the client’s positions in the case of a clearing broker default.\n
  • the positions and margins are held in segregated client accounts within the CB’s house account with LCH.Clearnet. This is to protect the client’s positions in the case of a clearing broker default.\n
  • the positions and margins are held in segregated client accounts within the CB’s house account with LCH.Clearnet. This is to protect the client’s positions in the case of a clearing broker default.\n
  • the positions and margins are held in segregated client accounts within the CB’s house account with LCH.Clearnet. This is to protect the client’s positions in the case of a clearing broker default.\n
  • the positions and margins are held in segregated client accounts within the CB’s house account with LCH.Clearnet. This is to protect the client’s positions in the case of a clearing broker default.\n
  • the positions and margins are held in segregated client accounts within the CB’s house account with LCH.Clearnet. This is to protect the client’s positions in the case of a clearing broker default.\n
  • the positions and margins are held in segregated client accounts within the CB’s house account with LCH.Clearnet. This is to protect the client’s positions in the case of a clearing broker default.\n
  • the positions and margins are held in segregated client accounts within the CB’s house account with LCH.Clearnet. This is to protect the client’s positions in the case of a clearing broker default.\n
  • the positions and margins are held in segregated client accounts within the CB’s house account with LCH.Clearnet. This is to protect the client’s positions in the case of a clearing broker default.\n
  • the positions and margins are held in segregated client accounts within the CB’s house account with LCH.Clearnet. This is to protect the client’s positions in the case of a clearing broker default.\n
  • the positions and margins are held in segregated client accounts within the CB’s house account with LCH.Clearnet. This is to protect the client’s positions in the case of a clearing broker default.\n
  • the positions and margins are held in segregated client accounts within the CB’s house account with LCH.Clearnet. This is to protect the client’s positions in the case of a clearing broker default.\n
  • the positions and margins are held in segregated client accounts within the CB’s house account with LCH.Clearnet. This is to protect the client’s positions in the case of a clearing broker default.\n
  • the positions and margins are held in segregated client accounts within the CB’s house account with LCH.Clearnet. This is to protect the client’s positions in the case of a clearing broker default.\n
  • \n
  • Regulators have also addressed these areas and the passage of the LSOC – or legally segregated, operationally commingled-rule has a number of implications for members, clients, and the clearing house itself. The LSOC rule is reviewed in more detail in a separate presentation.\n
  • Regulators have also addressed these areas and the passage of the LSOC – or legally segregated, operationally commingled-rule has a number of implications for members, clients, and the clearing house itself. The LSOC rule is reviewed in more detail in a separate presentation.\n
  • Regulators have also addressed these areas and the passage of the LSOC – or legally segregated, operationally commingled-rule has a number of implications for members, clients, and the clearing house itself. The LSOC rule is reviewed in more detail in a separate presentation.\n
  • Regulators have also addressed these areas and the passage of the LSOC – or legally segregated, operationally commingled-rule has a number of implications for members, clients, and the clearing house itself. The LSOC rule is reviewed in more detail in a separate presentation.\n
  • Regulators have also addressed these areas and the passage of the LSOC – or legally segregated, operationally commingled-rule has a number of implications for members, clients, and the clearing house itself. The LSOC rule is reviewed in more detail in a separate presentation.\n
  • Regulators have also addressed these areas and the passage of the LSOC – or legally segregated, operationally commingled-rule has a number of implications for members, clients, and the clearing house itself. The LSOC rule is reviewed in more detail in a separate presentation.\n
  • Regulators have also addressed these areas and the passage of the LSOC – or legally segregated, operationally commingled-rule has a number of implications for members, clients, and the clearing house itself. The LSOC rule is reviewed in more detail in a separate presentation.\n
  • Regulators have also addressed these areas and the passage of the LSOC – or legally segregated, operationally commingled-rule has a number of implications for members, clients, and the clearing house itself. The LSOC rule is reviewed in more detail in a separate presentation.\n
  • Regulators have also addressed these areas and the passage of the LSOC – or legally segregated, operationally commingled-rule has a number of implications for members, clients, and the clearing house itself. The LSOC rule is reviewed in more detail in a separate presentation.\n
  • Regulators have also addressed these areas and the passage of the LSOC – or legally segregated, operationally commingled-rule has a number of implications for members, clients, and the clearing house itself. The LSOC rule is reviewed in more detail in a separate presentation.\n
  • \n
  • Initial margin is collected from each member to cover potential losses in the event of a default. \n
  • Initial margin is collected from each member to cover potential losses in the event of a default. \n
  • The SwapClear initial margin is calculated on the basis of a five day holding period for members, seven- day for clients. The seven day holding period is derived from the five-day holding period transformed by the square root of 7/5 and is the aggregate worst case loss across all currencies over the historical period, using LCH.Clearnet’s proprietary Portfolio Approach to Interest Rate Scenarios – or PAIRS -- margin methodology. \n\n
  • The SwapClear initial margin is calculated on the basis of a five day holding period for members, seven- day for clients. The seven day holding period is derived from the five-day holding period transformed by the square root of 7/5 and is the aggregate worst case loss across all currencies over the historical period, using LCH.Clearnet’s proprietary Portfolio Approach to Interest Rate Scenarios – or PAIRS -- margin methodology. \n\n
  • The PAIRS value-at-risk model uses five years – or 1,250 days -- of historical market data to simulate changes in portfolio value from which an estimate of potential loss is calculated. \n
  • The PAIRS value-at-risk model uses five years – or 1,250 days -- of historical market data to simulate changes in portfolio value from which an estimate of potential loss is calculated. \n
  • Portfolio positions are fully revalued in each scenario. \n
  • Portfolio positions are fully revalued in each scenario. \n
  • In addition to PAIRS initial margin, SwapClear applies margin add-ons covering Credit Risk, Liquidity Risk and Sovereign Risk where a particular member’s inherent risk exposure is not captured within the PAIRS model. \n
  • In addition to PAIRS initial margin, SwapClear applies margin add-ons covering Credit Risk, Liquidity Risk and Sovereign Risk where a particular member’s inherent risk exposure is not captured within the PAIRS model. \n
  • \n
  • While the initial margin is established at the outset, the Variation Margin reflects current market conditions. \n\n\n\n
  • While the initial margin is established at the outset, the Variation Margin reflects current market conditions. \n\n\n\n
  • The net present value is calculated intraday based on standard valuation techniques. \n\n
  • The net present value is calculated intraday based on standard valuation techniques. \n\n
  • and currency portfolios are revalued according to the LCH.Clearnet yield curve.\n
  • and currency portfolios are revalued according to the LCH.Clearnet yield curve.\n
  • Margin charged/paid out in the currency of obligation\n
  • Margin charged/paid out in the currency of obligation\n
  • Price Alignment Interest (PAI) applied/charged to Variation Margin Balance\n\n
  • Price Alignment Interest (PAI) applied/charged to Variation Margin Balance\n\n
  • An OIS discounting approach to cash flows is used, and currency portfolios are revalued according to the LCH.Clearnet yield curve.\n\n
  • An OIS discounting approach to cash flows is used, and currency portfolios are revalued according to the LCH.Clearnet yield curve.\n\n
  • VM & IM are held in one account per clearing member \n\n
  • VM & IM are held in one account per clearing member \n\n
  • VM & IM are held in one account per clearing member \n\n
  • \n
  • In a default, LCH.Clearnet assumes all obligations arising from the defaulting member trades. As a first step, LCH works with the Default Management Group (or DMG) to hedge the major risk in the defaulting portfolio. \n
  • In a default, LCH.Clearnet assumes all obligations arising from the defaulting member trades. As a first step, LCH works with the Default Management Group (or DMG) to hedge the major risk in the defaulting portfolio. \n
  • In a default, LCH.Clearnet assumes all obligations arising from the defaulting member trades. As a first step, LCH works with the Default Management Group (or DMG) to hedge the major risk in the defaulting portfolio. \n
  • In a default, LCH.Clearnet assumes all obligations arising from the defaulting member trades. As a first step, LCH works with the Default Management Group (or DMG) to hedge the major risk in the defaulting portfolio. \n
  • In a default, LCH.Clearnet assumes all obligations arising from the defaulting member trades. As a first step, LCH works with the Default Management Group (or DMG) to hedge the major risk in the defaulting portfolio. \n
  • After the biggest risks have been hedged, the remaining portfolio is then split into currency units and auctioned to surviving clearing members.\n
  • After the biggest risks have been hedged, the remaining portfolio is then split into currency units and auctioned to surviving clearing members.\n
  • After the biggest risks have been hedged, the remaining portfolio is then split into currency units and auctioned to surviving clearing members.\n
  • After the biggest risks have been hedged, the remaining portfolio is then split into currency units and auctioned to surviving clearing members.\n
  • After the biggest risks have been hedged, the remaining portfolio is then split into currency units and auctioned to surviving clearing members.\n
  • After the biggest risks have been hedged, the remaining portfolio is then split into currency units and auctioned to surviving clearing members.\n
  • After the biggest risks have been hedged, the remaining portfolio is then split into currency units and auctioned to surviving clearing members.\n
  • \nIt’s worth remembering that SwapClear members absorb all obligations arising from defaulting member trades that surpass the defaulters IM, and default fund contribution . \n
  • \nIt’s worth remembering that SwapClear members absorb all obligations arising from defaulting member trades that surpass the defaulters IM, and default fund contribution . \n
  • \nIt’s worth remembering that SwapClear members absorb all obligations arising from defaulting member trades that surpass the defaulters IM, and default fund contribution . \n
  • \nIt’s worth remembering that SwapClear members absorb all obligations arising from defaulting member trades that surpass the defaulters IM, and default fund contribution . \n
  • \n
  • If the calculations used for valuing the portfolio are inaccurate, the potential exists for significant loss to the clearinghouse. This is one reason why SwapClear regularly reviews its valuation policy. When conducting a post-mortem on the Lehman collapse, areas for potential improvement were uncovered, specifically in OIS discounting and tenor basis risk.\n
  • If the calculations used for valuing the portfolio are inaccurate, the potential exists for significant loss to the clearinghouse. This is one reason why SwapClear regularly reviews its valuation policy. When conducting a post-mortem on the Lehman collapse, areas for potential improvement were uncovered, specifically in OIS discounting and tenor basis risk.\n
  • If the calculations used for valuing the portfolio are inaccurate, the potential exists for significant loss to the clearinghouse. This is one reason why SwapClear regularly reviews its valuation policy. When conducting a post-mortem on the Lehman collapse, areas for potential improvement were uncovered, specifically in OIS discounting and tenor basis risk.\n
  • When conducting a post-mortem on the Lehman collapse, areas for potential improvement were uncovered, specifically in OIS discounting and tenor basis risk.\n
  • When conducting a post-mortem on the Lehman collapse, areas for potential improvement were uncovered, specifically in OIS discounting and tenor basis risk.\n
  • \n
  • We discovered in our dialogue with the industry that some firms were using Libor and some were using OIS for valuation. Since 2008 valuation using OIS discounting has become the standard, as OIS s the closest measure to a true risk-free rate and is needed to properly value collateralized positions. The OIS discounting risk is the differences in valuation that can occur by using OIS versus Libor discounting methods. \n
  • We discovered in our dialogue with the industry that some firms were using Libor and some were using OIS for valuation. Since 2008 valuation using OIS discounting has become the standard, as OIS s the closest measure to a true risk-free rate and is needed to properly value collateralized positions. The OIS discounting risk is the differences in valuation that can occur by using OIS versus Libor discounting methods. \n
  • We discovered in our dialogue with the industry that some firms were using Libor and some were using OIS for valuation. Since 2008 valuation using OIS discounting has become the standard, as OIS s the closest measure to a true risk-free rate and is needed to properly value collateralized positions. The OIS discounting risk is the differences in valuation that can occur by using OIS versus Libor discounting methods. \n
  • We discovered in our dialogue with the industry that some firms were using Libor and some were using OIS for valuation. Since 2008 valuation using OIS discounting has become the standard, as OIS s the closest measure to a true risk-free rate and is needed to properly value collateralized positions. The OIS discounting risk is the differences in valuation that can occur by using OIS versus Libor discounting methods. \n
  • We discovered in our dialogue with the industry that some firms were using Libor and some were using OIS for valuation. Since 2008 valuation using OIS discounting has become the standard, as OIS s the closest measure to a true risk-free rate and is needed to properly value collateralized positions. The OIS discounting risk is the differences in valuation that can occur by using OIS versus Libor discounting methods. \n
  • We discovered in our dialogue with the industry that some firms were using Libor and some were using OIS for valuation. Since 2008 valuation using OIS discounting has become the standard, as OIS s the closest measure to a true risk-free rate and is needed to properly value collateralized positions. The OIS discounting risk is the differences in valuation that can occur by using OIS versus Libor discounting methods. \n
  • We discovered in our dialogue with the industry that some firms were using Libor and some were using OIS for valuation. Since 2008 valuation using OIS discounting has become the standard, as OIS s the closest measure to a true risk-free rate and is needed to properly value collateralized positions. The OIS discounting risk is the differences in valuation that can occur by using OIS versus Libor discounting methods. \n
  • As the net present value of trades can only be collateralized in cash in the denomination currency, LCH compensates for the cash posted or received in Euro, sterling or U.S. dollars at an OIS-based rate. To ensure no mismatch, LCH introduced OIS-based intraday and end of day valuations within the SwapClear methodology.\n
  • As the net present value of trades can only be collateralized in cash in the denomination currency, LCH compensates for the cash posted or received in Euro, sterling or U.S. dollars at an OIS-based rate. To ensure no mismatch, LCH introduced OIS-based intraday and end of day valuations within the SwapClear methodology.\n
  • As the net present value of trades can only be collateralized in cash in the denomination currency, LCH compensates for the cash posted or received in Euro, sterling or U.S. dollars at an OIS-based rate. To ensure no mismatch, LCH introduced OIS-based intraday and end of day valuations within the SwapClear methodology.\n
  • As the net present value of trades can only be collateralized in cash in the denomination currency, LCH compensates for the cash posted or received in Euro, sterling or U.S. dollars at an OIS-based rate. To ensure no mismatch, LCH introduced OIS-based intraday and end of day valuations within the SwapClear methodology.\n
  • \n
  • Differences in forward curve assumptions can cause major issues if the correct tenor isn’t used. \n
  • Differences in forward curve assumptions can cause major issues if the correct tenor isn’t used. \n
  • Differences in forward curve assumptions can cause major issues if the correct tenor isn’t used. \n
  • Differences in forward curve assumptions can cause major issues if the correct tenor isn’t used. \n
  • The forward curve must match the tenor of the position. Tenor basis risk is the risk of using the incorrect forward curves. \n
  • To ensure that the forward curve matches the tenor of the position, \n
  • LCH.Clearnet generates a zero-coupon curve per index frequency and currency for all major currencies and bases.\n
  • We hope that this presentation on OIS Swaps has been useful. For more information on our services, please go to the swapclear.com website or access more of our course material. \n
  • \n
  • Rmo webinar sep 28 solwip copy

    1. 1. SwapClear’s Risk Management overviewCCP2 Video series LCH.Clearnet Limited (LCHC)
    2. 2. SwapClear’s Risk Management overviewCCP2 Video series LCH.Clearnet Limited (LCHC)
    3. 3. SwapClear US Disclaimer The information contained in this presentation relates only to the SwapClear service offered by LCH.Clearnet Limited and does not necessarily apply to the SwapClear US service. 2
    4. 4. Clearinghouse Role Private & Confidential |
    5. 5. 4
    6. 6. LCH.Clearnet provides robust and prudent risk management in order tomeet its overriding objectives to: • Provide clearing members with a central counterparty of the highest quality SAFEGUARD CCP CLEARING MEMBER 4
    7. 7. LCH.Clearnet provides robust and prudent risk management in order tomeet its overriding objectives to: • Provide clearing members with a central counterparty of the highest quality 5
    8. 8. LCH.Clearnet provides robust and prudent risk management in order tomeet its overriding objectives to: • Provide clearing members with a central counterparty of the highest quality • Safeguard the interests of clearing members, clients and contributors to its clearing funds. CCP SAFEGUARD 5
    9. 9. Default Management Record Private & Confidential |
    10. 10. LCH.Clearnet has successfully managed a series of defaults, including: 7
    11. 11. LCH.Clearnet has successfully managed a series of defaults, including: 1990 Drexel Burnham Lambert 1991 Woodhouse Drake and Carey (Commodities) 1995 Baring Brothers 1998 Griffin Trading 2008 Lehman Brothers 2011 MF Global 7
    12. 12. Default Management Expertise Private & Confidential |
    13. 13. LCH.Clearnet Ltd. and SwapClear successfully managed the LehmanBrothers Europe IRS default - $9 trillion portfolio of 66,390 trades in 5 currencies LCH.Clearnet denotes LCH.Clearnet Limited | 9
    14. 14. LCH.Clearnet Ltd. and SwapClear successfully managed the LehmanBrothers Europe IRS default - $9 trillion portfolio of 66,390 trades in 5 currencies LCH.Clearnet denotes LCH.Clearnet Limited | 9
    15. 15. LCH.Clearnet Ltd. and SwapClear successfully managed the LehmanBrothers Europe IRS default - $9 trillion portfolio of 66,390 trades in 5 currenciesOnly 35% of Lehman’s initialmargin was used across all assets cleared in LCH.Clearnet Ltd LCH.Clearnet denotes LCH.Clearnet Limited | 10
    16. 16. LCH.Clearnet Ltd. and SwapClear successfully managed the LehmanBrothers Europe IRS default - $9 trillion portfolio of 66,390 trades in 5 currenciesOnly 35% of Lehman’s initialmargin was used across all assets cleared in LCH.Clearnet Ltd LCH.Clearnet denotes LCH.Clearnet Limited | 10
    17. 17. LCH.Clearnet Ltd. and SwapClear successfully managed the LehmanBrothers Europe IRS default - $9 trillion portfolio of 66,390 trades in 5 currenciesOnly 35% of Lehman’s initialmargin was used across all assets cleared in LCH.Clearnet Ltd 11
    18. 18. LCH.Clearnet Ltd. and SwapClear successfully managed the LehmanBrothers Europe IRS default - $9 trillion portfolio of 66,390 trades in 5 currenciesOnly 35% of Lehman’s initialmargin was used across all assets cleared in LCH.Clearnet Ltd 11
    19. 19. Guiding Principles Private & Confidential |
    20. 20. 13
    21. 21. Defaulter pays first: Ensure that the likelihood of mutualisation is remote andthat Losses are kept to a minimum DEFAULT $ CCP 13
    22. 22. 14
    23. 23. All members underwrite the default of others: All those who introduce risk tothe CCP must be prepared to underwrite the risk in the CCP from a processand financial standpoint CCP MEMBERS 14
    24. 24. 15
    25. 25. In DMP, reward good participation: Active and positive contributors in resolvinga default management situation should be rewarded, and vice versa Defaulted Positions Defaulted Positions MEMBERS $ 15
    26. 26. Guiding Principles 16
    27. 27. Guiding Principles MEMBER 16
    28. 28. Guiding Principles MEMBER = MEMBER 16
    29. 29. 17
    30. 30. 17
    31. 31. Membership & DMP process for a global service: Single default management process for a global product so as to be most efficient from a collateral, financial and default process standpoint MEMBER = 17
    32. 32. 18
    33. 33. All members have a limited liability : Clearing Members and PrudentialRegulators want banks’ exposures to CCPs to be capped and quantifiable MEMBER LIMITED LIABILITY 18
    34. 34. Ratio of Capital to Risk: Capital at risk (funded and unfunded) to CCPshould be consistent with the risk they are introducing 19
    35. 35. Ratio of Capital to Risk: Capital at risk (funded and unfunded) to CCPshould be consistent with the risk they are introducing CAPITAL MARKET RISK 19
    36. 36. 20
    37. 37. CCP must maximise client portability opportunities: Regulators are looking for clearing solutions that prevent contagion NEWMEMBERS FCM FCM 20
    38. 38. Basic Definitions of Terms Private & Confidential |
    39. 39. Default fund• A pool of member assets to provide protection in the case of a default. The SwapClear default fund is now segregated from other LCH.Clearnet assets. 22
    40. 40. Default fund• A pool of member assets to provide protection in the case of a default. The SwapClear default fund is now segregated from other LCH.Clearnet assets. 22
    41. 41. Default fund• A pool of member assets to provide protection in the case of a default. The SwapClear default fund is now segregated from other LCH.Clearnet assets.Initial margin • The up-front collateral, held for default protection, is required to register a trade. Based on the SwapClear historical VaR model, it is calculated using the worst case loss. 23
    42. 42. Default fund• A pool of member assets to provide protection in the case of a default. The SwapClear default fund is now segregated from other LCH.Clearnet assets.Initial margin • The up-front collateral, held for default protection, is required to register a trade. Based on the SwapClear historical VaR model, it is calculated using the worst case loss. 23
    43. 43. Default fund• A pool of member assets to provide protection in the case of a default. The SwapClear default fund is now segregated from other LCH.Clearnet assets.Initial margin • The up-front collateral, held for default protection, is required to register a trade. Based on the SwapClear historical VaR model, it is calculated using the worst case loss.Variation margin • The additional margin required for a trade as a result of market movements, representing the change in net present value of a position or a portfolio 24
    44. 44. Default fund• A pool of member assets to provide protection in the case of a default. The SwapClear default fund is now segregated from other LCH.Clearnet assets.Initial margin • The up-front collateral, held for default protection, is required to register a trade. Based on the SwapClear historical VaR model, it is calculated using the worst case loss.Variation margin • The additional margin required for a trade as a result of market movements, representing the change in net present value of a position or a portfolio 24
    45. 45. LSOC • Legally segregated, operationally commingled. A model that is to be mandated in the U.S. and is also available in Europe for protecting customer assets in a default. 25
    46. 46. LSOC • Legally segregated, operationally commingled. A model that is to be mandated in the U.S. and is also available in Europe for protecting customer assets in a default. 25
    47. 47. LSOC • Legally segregated, operationally commingled. A model that is to be mandated in the U.S. and is also available in Europe for protecting customer assets in a default. 26
    48. 48. LSOC • Legally segregated, operationally commingled. A model that is to be mandated in the U.S. and is also available in Europe for protecting customer assets in a default. 26
    49. 49. LSOC • Legally segregated, operationally commingled. A model that is to be mandated in the U.S. and is also available in Europe for protecting customer assets in a default.PAI • Price Alignment Interest paid to the clearing member to compensate for cumulative variation margin interest paid in by clearing member. It is cash-neutral for LCH.Clearnet. 26
    50. 50. SwapClear Default Waterfall Private & Confidential |
    51. 51. SwapClear Default Waterfall Private & Confidential |
    52. 52. SwapClear Default Waterfall Limited Recourse Remainder of LCH.Clearnet Ltd’s Capital CCP Insolvency? 28
    53. 53. SwapClear Default Waterfall Limited Recourse Key Exch. Traced EquityClear RepoClear SwapClear Funded Capital Derivatives Unfunded Capital LCH.Clearnet Capital Defaulter Initial/Variation Margin Defaulter’s Margin Defaulter’s Default Fund Contribution LCH.Clearnet Ltd Capital up to £20m Order of Remaining “Mutualised” non-defaulter Remaining non- defaulter Usage Default Fund contributions SwapClear Default Fund Contribution Replenishment of SwapClear Default Fund Remainder of LCH.Clearnet Ltd’s Capital SwapClear Service Closure CCP Insolvency? 28
    54. 54. Account Protection Private & Confidential |
    55. 55. Account Protection Private & Confidential |
    56. 56. Client submits positions and margin through clearingmember 30
    57. 57. Segregated AccountsClient submits positions and margin through clearingmember CLIENT MEMBER 30
    58. 58. Segregated Accounts 31
    59. 59. Segregated Accounts Client submits positions and margin through clearing member Positions and margins held in segregated accounts of the clearing member at the clearing houseCLIENT CLIENT CCP CLIENT FUNDS Segregated account 31
    60. 60. Segregated Accounts 32
    61. 61. Segregated AccountsClient submits positions and margin through clearingmemberPositions and margins held in segregated accounts of theclearing member at the clearing house 32
    62. 62. LSOC Rule Private & Confidential |
    63. 63. The LSOC rule requires DCOs to: 34
    64. 64. The LSOC rule requires DCOs to: • Separately hold account for client’s positions and collateral. • Avoid the use of one client’s initial margin to cover the obligations of another. FUNDS DCO FUNDS FUNDS 34
    65. 65. Margin Methodology Private & Confidential |
    66. 66. Initial Margin – PAIRS 36
    67. 67. Initial Margin – PAIRS • Represents the amount required to close out a full portfolio without loss in a default 36
    68. 68. Initial Margin – PAIRS • Represents the amount required to close out a full portfolio without loss in a default 37
    69. 69. Initial Margin – PAIRS • Represents the amount required to close out a full portfolio without loss in a default • Designed to cover worse-case losses based on historical scenarios from the past five years (1250 scenarios) 37
    70. 70. Initial Margin – PAIRS • Represents the amount required to close out a full portfolio without loss in a default • Designed to cover worse-case losses based on historical scenarios from the past five years (1250 scenarios) 38
    71. 71. Initial Margin – PAIRS • Represents the amount required to close out a full portfolio without loss in a default • Designed to cover worse-case losses based on historical scenarios from the past five years (1250 scenarios) • Based on five-day holding period for members & seven-day holding period (the period required for transfer or close-out in the event of a default) 38
    72. 72. Initial Margin – PAIRS • Represents the amount required to close out a full portfolio without loss in a default • Designed to cover worse-case losses based on historical scenarios from the past five years (1250 scenarios) • Based on five-day holding period for members & seven-day holding period (the period required for transfer or close-out in the event of a default) 39
    73. 73. Initial Margin – PAIRS • Represents the amount required to close out a full portfolio without loss in a default • Designed to cover worse-case losses based on historical scenarios from the past five years (1250 scenarios) • Based on five-day holding period for members & seven-day holding period (the period required for transfer or close-out in the event of a default) • Calculated on a Portfolio basis, using a filtered historical value at risk (VAR) method 39
    74. 74. Initial Margin – PAIRS • Represents the amount required to close out a full portfolio without loss in a default • Designed to cover worse-case losses based on historical scenarios from the past five years (1250 scenarios) • Based on five-day holding period for members & seven-day holding period (the period required for transfer or close-out in the event of a default) • Calculated on a Portfolio basis, using a filtered historical value at risk (VAR) method 40
    75. 75. Initial Margin – PAIRS • Represents the amount required to close out a full portfolio without loss in a default • Designed to cover worse-case losses based on historical scenarios from the past five years (1250 scenarios) • Based on five-day holding period for members & seven-day holding period (the period required for transfer or close-out in the event of a default) • Calculated on a Portfolio basis, using a filtered historical value at risk (VAR) method • Back tested against a 99.7% confidence interval 40
    76. 76. Initial Margin – PAIRS • Represents the amount required to close out a full portfolio without loss in a default • Designed to cover worse-case losses based on historical scenarios from the past five years (1250 scenarios) • Based on five-day holding period for members & seven-day holding period (the period required for transfer or close-out in the event of a default) • Calculated on a Portfolio basis, using a filtered historical value at risk (VAR) method • Back tested against a 99.7% confidence interval • Margin multipliers are not part of PAIRS, they sit “on top” of PAIRS model 40
    77. 77. Initial Margin – PAIRS • Represents the amount required to close out a full portfolio without loss in a default • Designed to cover worse-case losses based on historical scenarios from the past five years (1250 scenarios) • Based on five-day holding period for members & seven-day holding period (the period required for transfer or close-out in the event of a default) • Calculated on a Portfolio basis, using a filtered historical value at risk (VAR) method • Back tested against a 99.7% confidence interval 41
    78. 78. Initial Margin – PAIRS • Represents the amount required to close out a full portfolio without loss in a default • Designed to cover worse-case losses based on historical scenarios from the past five years (1250 scenarios) • Based on five-day holding period for members & seven-day holding period (the period required for transfer or close-out in the event of a default) • Calculated on a Portfolio basis, using a filtered historical value at risk (VAR) method • Back tested against a 99.7% confidence interval • Margin multipliers are not part of PAIRS, they sit “on top” of PAIRS model 41
    79. 79. Variation Margin (MTM) LCH.Clearnet denotes LCH.Clearnet Limited | 42
    80. 80. Variation Margin (MTM) • Represents the current value of the portfolio LCH.Clearnet denotes LCH.Clearnet Limited | 42
    81. 81. Variation Margin (MTM) • Represents the current value of the portfolio LCH.Clearnet denotes LCH.Clearnet Limited | 43
    82. 82. Variation Margin (MTM) • Represents the current value of the portfolio • Net Present Value derived intraday; based on market standard valuation techniques LCH.Clearnet denotes LCH.Clearnet Limited | 43
    83. 83. Variation Margin (MTM) • Represents the current value of the portfolio • Net Present Value derived intraday; based on market standard valuation techniques LCH.Clearnet denotes LCH.Clearnet Limited | 44
    84. 84. Variation Margin (MTM) • Represents the current value of the portfolio • Net Present Value derived intraday; based on market standard valuation techniques • Currency portfolios revalued according to the LCH.Clearnet yield curve LCH.Clearnet denotes LCH.Clearnet Limited | 44
    85. 85. Variation Margin (MTM) • Represents the current value of the portfolio • Net Present Value derived intraday; based on market standard valuation techniques • Currency portfolios revalued according to the LCH.Clearnet yield curve LCH.Clearnet denotes LCH.Clearnet Limited | 45
    86. 86. Variation Margin (MTM) • Represents the current value of the portfolio • Net Present Value derived intraday; based on market standard valuation techniques • Currency portfolios revalued according to the LCH.Clearnet yield curve • Margin charged/paid out in the currency of obligation LCH.Clearnet denotes LCH.Clearnet Limited | 45
    87. 87. Variation Margin (MTM) • Represents the current value of the portfolio • Net Present Value derived intraday; based on market standard valuation techniques • Currency portfolios revalued according to the LCH.Clearnet yield curve • Margin charged/paid out in the currency of obligation LCH.Clearnet denotes LCH.Clearnet Limited | 46
    88. 88. Variation Margin (MTM) • Represents the current value of the portfolio • Net Present Value derived intraday; based on market standard valuation techniques • Currency portfolios revalued according to the LCH.Clearnet yield curve • Margin charged/paid out in the currency of obligation • Price Alignment Interest (PAI) applied/charged to Variation Margin Balance LCH.Clearnet denotes LCH.Clearnet Limited | 46
    89. 89. Variation Margin (MTM) • Represents the current value of the portfolio • Net Present Value derived intraday; based on market standard valuation techniques • Currency portfolios revalued according to the LCH.Clearnet yield curve • Margin charged/paid out in the currency of obligation • Price Alignment Interest (PAI) applied/charged to Variation Margin Balance LCH.Clearnet denotes LCH.Clearnet Limited | 47
    90. 90. Variation Margin (MTM) • Represents the current value of the portfolio • Net Present Value derived intraday; based on market standard valuation techniques • Currency portfolios revalued according to the LCH.Clearnet yield curve • Margin charged/paid out in the currency of obligation • Price Alignment Interest (PAI) applied/charged to Variation Margin Balance • Portfolio valuations using OIS discounting LCH.Clearnet denotes LCH.Clearnet Limited | 47
    91. 91. Variation Margin (MTM) • Represents the current value of the portfolio • Net Present Value derived intraday; based on market standard valuation techniques • Currency portfolios revalued according to the LCH.Clearnet yield curve • Margin charged/paid out in the currency of obligation • Price Alignment Interest (PAI) applied/charged to Variation Margin Balance LCH.Clearnet denotes LCH.Clearnet Limited | 48
    92. 92. Variation Margin (MTM) • Represents the current value of the portfolio • Net Present Value derived intraday; based on market standard valuation techniques • Currency portfolios revalued according to the LCH.Clearnet yield curve • Margin charged/paid out in the currency of obligation • Price Alignment Interest (PAI) applied/charged to Variation Margin Balance • Portfolio valuations using OIS discounting • VM & IM are held in one account per clearing member LCH.Clearnet denotes LCH.Clearnet Limited | 48
    93. 93. Default Management Risk Methodologies Private & Confidential |
    94. 94. LCH works with Default Management Group (DMG) tohedge the defaulting portfolio
    95. 95. LCH works with Default Management Group (DMG) tohedge the defaulting portfolio Hedge DMG Defaulters Portfolio
    96. 96. Portfolio split into currency units and auctioned to survivingclearing members. Defaulter’s Portfolio
    97. 97. Portfolio split into currency units and auctioned to survivingclearing members. Defaulter’s Portfolio $ CLIENT FUNDS CCP CLIENT FUNDS
    98. 98. In a default, LCH.Clearnet assumes all obligationsarising from the defaulting member trades
    99. 99. In a default, LCH.Clearnet assumes all obligationsarising from the defaulting member trades Defaulting Members LCH Portfolio
    100. 100. CCPs Clearing Risk Private & Confidential |
    101. 101. LCH.Clearnet Risk 54
    102. 102. LCH.Clearnet RiskIf LCH valuation is different to that of auctionparticipants, clearinghouse could absorb losses • Therefore, LCH regularly reviews its valuation policy 54
    103. 103. LCH.Clearnet RiskIf LCH valuation is different to that of auctionparticipants, clearinghouse could absorb losses • Therefore, LCH regularly reviews its valuation policy 55
    104. 104. LCH.Clearnet RiskIf LCH valuation is different to that of auctionparticipants, clearinghouse could absorb losses • Therefore, LCH regularly reviews its valuation policyLCH focuses on valuation of positions, tenor basisrisk, and OIS discounting 55
    105. 105. OIS Discounting Risk Private & Confidential |
    106. 106. LCH.Clearnet RiskValuation differences arising from the use of OIS versus Libordiscounting method can create significant clearinghouse risk. 57
    107. 107. LCH.Clearnet RiskValuation differences arising from the use of OIS versus Libordiscounting method can create significant clearinghouse risk. 57
    108. 108. LCH.Clearnet RiskValuation differences arising from the use of OIS versus Libordiscounting method can create significant clearinghouse risk. LIPOR Valuation OIS 57
    109. 109. LCH.Clearnet RiskValuation differences arising from the use of OIS versus Libordiscounting method can create significant clearinghouse risk. LIPOR Valuation OIS 57
    110. 110. Valuation differences arising from the use of OIS versus Libor discounting method can create significant clearinghouse risk.LCH.Clearnet overcame this problem by: • Introducing OIS-based intraday and end of day valuations within the SwapClear valuation methodology for the major currencies 58
    111. 111. Valuation differences arising from the use of OIS versus Libor discounting method can create significant clearinghouse risk.LCH.Clearnet overcame this problem by: • Introducing OIS-based intraday and end of day valuations within the SwapClear valuation methodology for the major currencies OIS VALUATION 58
    112. 112. Tenor Basis Risk Private & Confidential |
    113. 113. Differences in forward curve assumptions can cause major issues ifthe correct tenor curve isn’t used. Bad Tenor 60
    114. 114. Differences in forward curve assumptions can cause major issues ifthe correct tenor curve isn’t used. Bad Tenor 60
    115. 115. Differences in forward curve assumptions can cause major issues ifthe correct tenor curve isn’t used. Bad TenorGood Tenor 60
    116. 116. Differences in forward curve assumptions can cause major issues ifthe correct tenor curve isn’t used. Bad TenorGood Tenor 60
    117. 117. Differences in forward curve assumptions can cause major issues ifthe correct tenor curve isn’t used. 61
    118. 118. Differences in forward curve assumptions can cause major issues ifthe correct tenor curve isn’t used. 61
    119. 119. Differences in forward curve assumptions can cause major issues ifthe correct tenor curve isn’t used.LCH.Clearnet overcame this problem by: • Generating a zero coupon curve per index frequency and currency for major currencies 62
    120. 120. Differences in forward curve assumptions can cause major issues ifthe correct tenor curve isn’t used.LCH.Clearnet overcame this problem by: • Generating a zero coupon curve per index frequency and currency for major currencies 62
    121. 121. Differences in forward curve assumptions can cause major issues ifthe correct tenor curve isn’t used.LCH.Clearnet overcame this problem by: • Generating a zero coupon curve per index frequency and currency for major currencies • Calculating forward rates from the correct tenor curve 63
    122. 122. Differences in forward curve assumptions can cause major issues ifthe correct tenor curve isn’t used.LCH.Clearnet overcame this problem by: • Generating a zero coupon curve per index frequency and currency for major currencies • Calculating forward rates from the correct tenor curve 63
    123. 123. Jeffrey M. B.A. History/English Yale Sol Steinberg V.P. of Partnerships & Alliances for Bandman LCH.Clearnet’s SwapClear serviceJ.D. StanfordHead of Partnerships & Alliances for New York steering committee of theLCH.Clearnet’s SwapClear service Professional Risk Managers International Association (PRIMIA) and ISDA-FIA memberAuthor of The New Clearing Landscape in theU.S., U.K. and Europe Helped design equitable default management model for SwapclearResponsible for rebuilding and managingCantor Fitzgerald’s market data business after Designed risk management system offered tothe events of September 11 clients by Citco Fund ServicesLCH.Clearnet Limited Call : 212.513.826917 State Street, 28th Floor Email : CCP2@lchclearnet.comNew York, NY 10004 Browse: www.swapclear.com 64
    124. 124. Jeffrey M. B.A. History/English Yale Sol Steinberg V.P. of Partnerships & Alliances for Bandman LCH.Clearnet’s SwapClear serviceJ.D. StanfordHead of Partnerships & Alliances for New York steering committee of theLCH.Clearnet’s SwapClear service Professional Risk Managers International Association (PRIMIA) and ISDA-FIA memberAuthor of The New Clearing Landscape in theU.S., U.K. and Europe Helped design equitable default management model for SwapclearResponsible for rebuilding and managingCantor Fitzgerald’s market data business after Designed risk management system offered tothe events of September 11 clients by Citco Fund ServicesLCH.Clearnet Limited Call : 212.513.826917 State Street, 28th Floor Email : CCP2@lchclearnet.comNew York, NY 10004 Browse: www.swapclear.com 64
    125. 125. DisclaimerThe contents of this document are a broad overview of certain elements of the SwapClear clearing service operated byLCH.Clearnet Limited and/or its affiliates and have been provided to you for information purposes only. The contents of thisdocument are confidential and provided to you pursuant to and in accordance with the Certification Program ParticipationAgreement entered into between LCH.Clearnet Limited and the Consultancy that you represent.Nothing in this document should be considered to be advice of any nature (including legal advice). There is no substitute foranalyzing the Regulations, Rules and Procedures of LCH.Clearnet as well as other ancillary documentation. Accordingly, you maynot rely upon the contents of this document and should always seek your own independent legal advice.The information and any opinion contained in this document, does not constitute investment advice or a personal recommendationwith respect to any applicable securities or other financial instruments. This document has not been prepared for a specificindividual or entity and accordingly no reliance should be placed on it. Nothing in this document should be taken as a public offer tosell or to buy any applicable securities or financial instruments.Copyright © LCH.Clearnet Limited 2012All rights reserved. No part of this document may be copied, whether by photographic or any other means, without the prior writtenconsent of LCH.Clearnet Limited.SwapClear is a registered trademark of LCH.Clearnet Limited.Trademark registrations pending for “CCP Squared” and “CCP2” 65

    ×