LCH has introduced a new type of client account within its SwapClear service.
The account allows buy side clients to deliver collateral directly to the clearing house and to retain beneficial title to it. Segregation at an International Central Securities Depository (ICSD) ensures that such securities collateral remains client-specific.
This aims to increase operational efficiency and also eliminates the transit risk arising where a client delivers collateral to the clearing house via its clearing member.
JP Morgan is the first clearing member, and Aviva Investors is the first buy side client, to use this new account type. BNP Paribas and HSBC have also confirmed their readiness to support the new account structure.
To enable a client to transfer collateral directly from its account to LCH Limited, the client or its custodian must open a segregated account with an ICSD. Euroclear Bank is the first ICSD to provide this service for the CustodialSeg account.
Michael Davie, global head of rates at LCH, says that the new account type is in response to the increased focus on efficient collateral management from financial services firms.
“Being able to lodge collateral direct with LCH is a positive step as it allows us to manage our collateral delivery more effectively and to ensure our assets remain identifiable as ours, while lodged at the CCP. We’re proud to be the first client to use this new account type and look forward to continuing this work with LCH,” says Barry Hadingham, head of derivatives and counterparty risk at Aviva.
Raphaël Masgnaux, global head of prime solutions and financing at BNP Paribas, adds: “The launch of CustodialSeg is a key development for the industry, providing buy side firms with further options of how to protect their assets, a major point of concern for many firms. Any solutions that enable clients to seek increased protection of their assets providing them with flexibility to partner with their custodians to efficiently manage their collateral are encouraged.”
Meanwhile, Danny Foster, EMEA derivatives clearing sales and coverage at HSBC, says that “the protection of a client’s assets at a CCP is a key priority in our approach to clearing”, and that offering clients an account at LCH with the highest levels of collateral segregation is therefore “a logical next step”.
He continues: “Furthermore, as clients increasingly post non-cash collateral to cover their IM requirements, the flexibility of this new account structure will enable them to better manage and substitute their collateral on an intraday basis.”
The CustodialSeg account is available for eligible SwapClear clients in England, Ireland, Scotland and the Netherlands that are accessing clearing via a SwapClear clearing member.