LCH.Clearnet, New York Portfolio Clearing (NYPC), The Depository Trust & Clearing Corporation (DTCC) and NYSE Euronext (NYX) will expand their existing combined one-pot cross-margining arrangement to include interest rate swaps cleared by LCH.Clearnet.
The parties goal is to deliver greater capital efficiency to market participants by combining NYSE Liffe US-traded interest rate futures contracts already cleared by NYPC, fixed income cash and repo trades cleared by the DTCCs Fixed Income Clearing Corporation (FICC) and interest rate swaps cleared by LCH.Clearnets SwapClear service into a single portfolio for purposes of margin netting and offsetting.
The existing NYPC and FICC one-pot arrangement currently offsets margin requirements for both fixed-income cash and repo trades and futures contracts. NYPC also has an open architecture that allows for connectivity to LCH.Clearnets SwapClear platform. The agreement would extend those benefits to interest rate swaps, thereby improving efficiency to market participants. The collaborative arrangements, once in place, would also improve transparency and risk mitigation by creating the opportunity for regulators to obtain a single, combined view of portfolio risk for participants across a wider range of asset classes.
As agreed in the MOU, the parties will assess areas where operational and collateral management efficiencies can be achieved through mutually agreed service level arrangements between the organizations in the US. All parties have also committed to developing an aligned default management process to protect market participants, as well as the development of payment and settlement mechanisms for non-US dollar products. As was the case with the initial one-pot margining plan that was first brought to market in March 2011, the final margining structure and agreements would be subject to the review and approval of both the US Commodity Futures Trading Commission and the US Securities and Exchange Commission. Approvals will also be sought from other regulatory bodies. Additionally, all parties have agreed to develop a joint governance arrangement regarding the combined risk management system and will work together to secure the appropriate regulatory approvals, both in the US and abroad.
All of our customer firms face new capital requirements from new regulations, said Michael Bodson, COO, DTCC. Being able to offset some of that through innovative margining schemes such as what is currently being offered by FICC and NYPC and enhanced through this alliance with SwapClear can be of great benefit to all our clientsand help regulatory authorities as well.
By adding interest rate swaps to the same methodology utilized by market participants for the margining of their cash and futures trades, we believe this collaboration provides the market with a creative solution that addresses many of the industrys needs around scarcity of capital and delivers a powerful new value proposition for interest rate futures traded on NYSE Liffe U.S., said Thomas Callahan, CEO of NYSE Liffe US.
(JDC)