LCH.Clearnet Collaborates With Euroclear on U.K. Repo Clearing

LCH.Clearnet has launched a new central clearing product for U.K government bonds used for general collateral (GC) repo trades aimed at alleviating operational and liquidity risk in managing these transactions.

The clearing house developed the product, Term £GC, as a joint initiative with Euroclear UK & Ireland, the London Money Market Association (LMMA) and gilt repo market participants with support from the Bank of England.

LCH.Clearnet plans for Term £GC to replace its existing Sterling GC product, and the firm has agreed on a migration strategy with market participants that will support a move of trading liquidity from Sterling GC into the Term £GC product in the fourth quarter of 2014, and any open positions in Sterling GC to be switched into the Term £GC product in 2015.

Term £GC uses a dual netting feature designed to optimize netting opportunities for LCH.Clearnet’s members as well as new delivery by value settlement mechanism at Euroclear UK & Ireland that removes the requirement for daily return of cash and collateral for term trades.

The new product will also supports margin offset against trades in specific-ISIN U.K. Gilts, which can reduce clearing costs.

Repo automated trading systems and voice brokers will both be able to execute trades in Term £GC.

“We have worked closely with the gilt repo market to ensure that the design of Term £GC delivers the essential benefits of reduced operational risk and an improvement in how Sterling settlement liquidity is managed. We would like to thank gilt repo market participants and industry stakeholders who have worked with us to design, test and implement the Term £GC product and for their support in delivering this product to the market,” says John Burke, executive director, Fixed Income at LCH.Clearnet.

Term £GC “reduces liquidity risks and increases operational efficiencies in the money market,” says John Trundle, CEO at Euroclear UK & Ireland. “Risk reduction and efficiency in the markets we serve are the core purposes of EUI so we have been pleased to develop our delivery by value collateral services in this way. The new term arrangements, including collateral optimization and substitution, have enabled the market to move away from the daily roll-over of cash and collateral to an efficient process where the requirements to settle securities are aligned with the maturity of the underlying GC transactions.”

Ian Mair, chairman of the LMMA, adds: “It not only benefits the gilt repo market because it reduces risk, it also enhances liquidity management and just as importantly provides a clear financial stability benefit for the whole market.”