LCH.Clearnet raises margin call on Italian debt

LONDON (Reuters) - The cost of using Italian bonds to raise funds rose on Wednesday after clearing house LCH.Clearnet SA increased the margin on debt from the euro zone's third largest country at a time when its bonds yields are close to levels deemed unsustainable.

Banks use government bonds as collateral to access cash in the repurchase (repo) market, in which a handful of clearing houses play a vital role, assuming lending risks to provide institutions with the cash.

Clearing houses, such as LCH.Clearnet, collect cash in the form of margin on individual trades, which they hold centrally to refund members left out of pocket in the event of a default.

When LCH.Clearnet Ltd took similar action on Portuguese and Irish debt as bond yields soared, it added to selling pressure on the paper. Both countries were later forced to seek bailouts.

With benchmark 10-year Italian government bond yields approaching 7 percent, LCH.Clearnet SA raised the initial margin call applied to Italian debt by between 3.5 and 5 percentage points across all maturities of BTP and inflation-linked BTP government bonds.

"This step will likely generate spread widening and it will affect the banks' ability to net their positions through LCH," said ING rate strategist Alessandro Giansanti.

The changes, which include raising the initial margin call on 7- to 10-year debt by 5 percentage points to 11.65 percent, will come into effect on November 9 at the market close and will affect margin calls from November 10, Paris-based LCH.Clearnet SA said on its website.

(Reporting by William James and Kirsten Donovan, editing by Nigel Stephenson)