December 19, 2017 / 12:21 PM / 10 months ago

LCH begins credit options clearing

LONDON, Dec 19 (IFR) - LCH has become the first clearinghouse to begin clearing credit options, with the service being offered on contracts referencing two key European credit default swap indices.

The company’s CDSClear platform will initially cover interdealer and client flows for one-month, two-month and three-month expiries on IHS Markit’s five-year Europe Main and Crossover indices. Pending regulatory approval, it will expand the service to the same expiries referencing US five-year CDS indices, CDX IG and CDX HY.

The development comes after a rise in the cost of bilateral derivatives exposures following new regulations that require swaps counterparties to post initial and variation margin against their uncleared contracts. Those increased costs have led to more demand for clearing.

According to Samik Chandarana, head of global credit index trading at JP Morgan, the new service creates opportunities for netting and the ability to better manage initial margin.

“As the first framework of its kind, this is an important step in the evolution of this market,” he said.

LCH said users of the service can reap initial margin benefits by cross-margining options against indices and single names. In addition, by bringing numerous bilateral counterparty exposures down to a single net exposure to the clearinghouse, users can ease the options exercise process.

“By extending CDSClear to the clearing of credit index options, members and clients can take advantage of significant funding, capital and operational benefits,” Frank Soussan, global head of CDSClear, said in a statement. “This latest service is part of our continued expansion and innovation at CDSClear as more of the market moves toward clearing.”

LCH’s risk framework for clearing credit options has been approved by European and French regulators under the European Markets Infrastructure Regulation. US regulators, CFTC and SEC, have also given the service the green light.

Post-trade processing provider MarkitSERV will process cleared credit index options for both dealer-to-dealer and dealer-to-client flows.

The expansion into credit options follows the addition of CDX high-yield CDS clearing in July. Since its international inception in 2012, CDSClear has cleared €177bn notional-equivalent in single names and €1.3trn in index CDS. Rival Intercontinental Exchange is still a long way ahead by volume, having cleared more than US$95trn notional across its US and European credit platforms since inception in 2009.

Francois Popon, head of European CDS trading at Societe Generale, said LCH’s latest development will enhance risk management and improve efficiency across the bank’s credit business.

“Evolving regulations as well as the significant capital and operational benefits have acted as a driver for us to make more use of clearing services,” he said. (Reporting by Helen Bartholomew; Editing by Gareth Gore)

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