LONDON, Aug 14 (IFR) - LCH has introduced a custodial segregation model for buyside firms, enabling clients on its SwapClear platform to deliver collateral directly to the clearinghouse and retain beneficial title to it.
Aviva has become the first buyside client to use LCH’s CustodialSeg account while JP Morgan is the first clearing member to offer the service to its clients. BNP Paribas and HSBC have also confirmed their support for the new account structure.
“Being able to lodge collateral direct with LCH is a positive step as it allows us to manage our collateral delivery more effectively and to ensure our assets remain identifiable as ours, while lodged at the CCP,” said Barry Hadingham, head of derivatives and counterparty risk at Aviva Investors.
The custodial segregation solution addresses growing demand for services that provide buyside firms with full bankruptcy remoteness from other clients, clearing members and the clearinghouse.
LCH’s effort has been at least three years in the works as the clearinghouse aimed to strike a balance between enhanced protection and the increased costs that come with the premium service.
As large swathes of the US$483trn over-the-counter swaps market have been pushed into central clearing, and with buyside firms facing new margin requirements on their non-cleared swap trades, clearing and collateral management have become more pressing issues for all derivatives users including buyside firms.
“As we see a growing number of clients onboarding and actively clearing at LCH, there’s increased focus on efficient collateral management,” said Michael Davie, global head of rates at LCH. “The new account structure offers enhanced collateral protection for European clients and simplifies the way they lodge collateral with us.”
With the new account, buyside collateral is transferred directly from a client’s account to LCH, reducing transit risk inherent in a standard client clearing model that would see collateral delivered to the clearinghouse via its clearing member bank.
The collateral is segregated at an international central securities depository, requiring a segregated account to be opened by the client or its custodian. Euroclear Bank is the first ICSD to provide the service for the CustodialSeg account.
“As clients increasingly post non-cash collateral to cover their initial margin requirements, the flexibility of this new account structure will enable them to better manage and substitute their collateral on an intraday basis,” said Danny Foster, EMEA derivatives clearing sales and coverage at HSBC. (Reporting by Helen Bartholomew)