LCH Gets Approval to Clear CDS for European InvestorsNandini Sukumar
LCH.Clearnet Group Ltd. said it obtained regulatory permission in France to clear credit-default swaps index trades in Europe for investors, the first time they can clear the derivatives.
The clearinghouse, based in Paris, also expects to back single-name credit-default swaps “soon,” Charlie Longden, chief executive officer of LCH’s CDSClear, said in an interview today. The service will start testing with clients and expects to start this quarter, he added. LCH.Clearnet SA is a unit of London-based LCH.Clearnet Group Ltd.
The U.S. Dodd-Frank Act requires clearing for most swap contracts, while international regulations under the Basel III accords encourage the use of clearinghouses for the derivatives through favorable capital treatments. The European Commission is also working on legislation, called the European Market Infrastructure Regulation, that would govern most aspects of clearing.
“The market has been looking for a European CDS clearing solution for some time now,” Barry Hadingham, head of derivatives and counterparty risk at Aviva Investors, said in an e-mailed statement. “We are particularly pleased to see that the solution offers improved portability conditions and easy to navigate legal arrangements.”
Clearinghouses operate as central counterparties for every buy and sell order executed by their members, who post collateral, reducing the threat from a trader’s default.
The index-clearing service will offer European funds so-called asset tagging, Longden said. Asset Tagging allows members of the clearinghouse to track which of their fund manager-related non-cash collateral and positions can be transferred, or ported, to another member if there’s a default. The index-clearing service also simplifies the legal documentation process between fund managers and the clearing members, who are typically banks and brokers.
The “service is mainly for the non U.S. buyside,” Malavika Solanki, head of business development, sales and marketing at CDSClear, said in an interview. “We’ve been talking with a wide variety of clients for the better part of a year -- all the traditional buyside institutions and also a number of regional banks who are examining whether client clearing suits them. Until the rulebook was approved it wasn’t real to the market. Now it sets in stone the exact procedures and policies so it’s no longer just a conversation. It’s not just conceptual.”
LCH, now majority-owned by London Stock Exchange Group Plc, operates CDSClear and also offers a service to process foreign-exchange swaps. Further, it is the world’s largest interest-rate-swap clearinghouse. The company in February 2012 appointed David Weisbrod, who spent 40 years at JPMorgan Chase & Co., to head its U.S. unit.
The world’s largest swaps dealers including JPMorgan, Deutsche Bank AG and Barclays Plc are moving much of the $23.5 trillion privately negotiated credit-derivatives market to clearinghouses to reduce the risk of a counterparty failing.
“This is the first time European clients are able to clear CDS in Europe,” LCH’s Longden said in the interview. “This service was built to create competition in the market. We’ve been clearing CDS for a year and the idea is to broaden the service. We are now engaging with a lot of clients, engaging with a lot of clearing brokers. People do want to get ready is the message.”