LCH Raises Irish Bond-Trading Margin as Yields Soar
LCH Clearnet Ltd. demanded its clients place a larger deposit when trading Irish government bonds after the yield on the nation’s debt soared, and may impose similar measures on other European securities.
The additional margin requirement of 15 percent, which takes effect tomorrow, will be charged on investors’ net position in Irish debt from Nov. 11, and the change will be reflected in a margin call on Nov. 12, LCH said on its website. The London-based company is the world’s second-largest fixed- income clearing house.
The move by LCH pushed Irish bonds lower, extending their two-week decline as investors speculate costs to bail out the nation’s banks have made the government debt load unsustainable. LCH told clients on Oct. 5 that it was considering the increase after yields on Irish 10-year debt rose to more than 450 basis points above a euro-region AAA benchmark bond. The clearing house handles about 8 billion euros ($11 billion) of Irish bond trades daily, mostly repurchase agreements.
“This is LCH recognizing that the markets are quite serious about the potential for Ireland to default or restructure,” said Simon Penn, a market analyst at UBS AG in London.
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 of the participants in a trade fail.
‘Significant and Appropriate’
“If we judge that it is appropriate to apply the risk framework we have for Ireland elsewhere then we will do so,” John Burke, head of fixed income at LCH, said by phone today. “Having taken the step to invoke the risk framework for Ireland, it is a significant and appropriate move.”
Traders currently lodge funds with LCH equal to 5.62 percent for securities repayable in more than 11 years and less for shorter-maturity debt. Irish trades will be subject to an additional 15 percent on top of that current margin, Steven Geoghegan, a risk manager at LCH, said in an e-mail.
The yield on Irish 10-year debt surged 44 basis points to 8.52 percent as of 1:24 p.m. in London. The spread over the Bloomberg Fair Value Sovereign Benchmark 10-year bond widened 32 basis points to 585 basis points, according to Bloomberg generic data. It was at 370 basis points as recently as Oct. 26.
“Irish banks are not LCH members, so this should not directly affect their funding,” Francesco Garzarelli, chief interest-rate strategist at Goldman Sachs Group Inc. in London, said in a research report today. “However, this could amplify the re-assessment of counterparty risk.”
LCH also clears trades in equities, interest-rate swaps and commodities. It’s owned by banks, brokerages and exchanges that use its clearing services.
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