LCH Clearnet Ltd. demanded clients place a larger deposit to trade Irish bonds for the third time this month after the yield premium on the nation’s debt soared.
LCH will increase the extra margin requirement for Irish debt to 45 percent from 30 percent and impose a so-called margin call tomorrow, the clearing house said on its website today.
The extra yield investors demand to hold Irish 10-year bonds instead of their German counterparts rose to 6.19 percentage points today. Clearing houses such as LCH guarantee investors’ trades are completed by standing in the middle of two counterparties, and raise margin requirements to protect themselves against losses should one side of the trade fail.
“We take the yield spread and we have to make a judgment on an appropriate level of margin in a way that’s consistent with our risk framework,” John Burke, head of fixed income at LCH, said today by phone. “The yield spread of Ireland over a AAA basket as of last night had exceeded 600 basis points. We’re not taking a forward-looking position on Ireland.”
The charges will be based on outstanding positions at the close of business today. They apply to Irish government bond repurchase agreements cleared through LCH’s RepoClear service. On Nov. 10, LCH said it would impose an extra 15 percent margin requirement on investors’ net positions in Irish debt, and doubled that to 30 percent on Nov. 17.
LCH published a circular to RepoClear members on Oct. 5 saying that a yield premium, or spread, of more than 450 basis points between a nation’s 10-year bonds and a AAA benchmark would “be indicative of additional sovereign risk,” and may cause it to “materially increase the margin required for positions in that issuer.”
Burke declined to comment on whether LCH will impose a similar increase for other nations’ debt. The spread between Portuguese 10-year bonds and the Bloomberg Fair Value benchmark of AAA euro-region sovereign debt was at 409 basis points at yesterday’s close.
Irish 10-year bonds rose today, with the yield slipping two basis points to 9.11 percent as of 8:56 a.m. in London. The yield has risen from 8.35 percent on Nov. 19, even after Ireland requested a financial bailout as the nation battles to reassure investors that it can control its budget deficit and support its banks.
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