Nov. 2 (Bloomberg) -- Traders in Irish government bonds may have to post bigger deposits, known as margins, when executing transactions through LCH.Clearnet Ltd. after the value of the securities plunged.
Trading may become more expensive because the yield spread between Irish 10-year government bonds and an index of AAA-rated euro-region debt has surpassed 450 basis points, said John Burke, head of fixed income at LCH in London. LCH will also gauge Ireland’s credit-default swaps and implied credit rating before deciding whether to increase margin requirements, he said, declining to specify those trigger levels.
“LCH is doing what the market is doing and recognizing there are various risks,” said Simon Penn, a market analyst at UBS Warburg Ltd. in London. “If LCH makes a move and the market recognizes this, then that could spin the spread onto 500 basis points and beyond and we could be in the situation we were in with Greece.”
Ireland’s funding costs have soared on concern the cost of bailing out the nation’s banks is increasing, with the 10-year yield climbing more than 1.2 points in the past three weeks to about 7.23 percent. Irish bonds currently yield about 454 basis points more than the Bloomberg Fair Value Euro Sovereign Benchmark 10-Year index, up from 441 yesterday.
Traders would have to lodge funds equal to 15 percent of their trades with LCH, which handles about 8 billion euros ($11 billion) of Irish bond trades daily, Burke said.
“We would only invoke that framework for any market if it went convincingly through those levels” of 450 basis points, he said. “It would be very easy for us to withdraw from this market, but we’re in and we’re going to stay in. If the market, through its pricing is saying there’s a credible risk in Irish bonds, for instance, then we have to act on that.”
In a notice to its members dated Oct. 5, LCH said it would “generally consider a spread of 450 basis points over the 10-year AAA benchmark to be indicative of additional sovereign risk,” prompting higher margin demands. There may also be “further material increases in margin charged as the spread deteriorates further,” the company said.
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