Clearing for Container Freight Swap Agreements. Marine Money Hamburg 23 February 2011

Transcription

1 Clearing for Container Freight Swap Agreements Marine Money Hamburg 23 February 2011

2 About LCH Clearnet LCH.Clearnet is the leading independent clearing house, serving major international exchanges and platforms, as well as a range of OTC markets It clears a broad range of asset classes including: securities, exchange traded derivatives, energy, freight, interbank interest rate swaps and euro and sterling denominated bonds and repos As a clearing house, LCH.Clearnet sits in the middle of a trade, assuming the counterparty risk involved when two parties (or members) trade. When the trade is registered with LCH.Clearnet, it becomes the legal counterparty to the trade, ensuring its financial performance; if one of the parties fails, LCH.Clearnet steps in By assuming the counterparty risk, LCH.Clearnet underpins many important financial markets, facilitating trading and increasing confidence within the market 2

3 Markets Served Borse Berlin Equiduct Trading SmartPool SecFinex Luxembourg Stock Exchange NYSE Euronet London Stock Exchange SWX Europe Ltd Liffe EDX London ICAP Electronic Broking espeed ETCMS MTS VIEL & Cie Prominnofi tprepo SwapsWire SWIFTNet Accord HKMEx Liffe London Metal Exchange Freight Emissions Iron Ore and Steel Coal Fertlizers Securities Exchange-Traded Financial and Equity Derivatives Securities Swaps Commodities OT C Commodities Euroclear UK and Ireland Ltd Euroclear Belgium Euroclear France Euroclear NL Euroclear Bank SIS Clearstream International Clearstream Frankfurt VPS NCSD Interbolsa Monte Titoli VP - Vaerdepapincentraien BanqueNationale de Belgique Commodities Cash Soon to be launched 3

4 Key benefits of Clearing Reducing credit risk. Reducing trading exposures to a single net amount with a counterparty of the highest quality. Increasing capital and market efficiency. Increasing trading capacity through reduced balance sheet constraints. Providing favorable regulatory capital treatment of exposures to CCPs. Facilitating full post trade anonymity and reducing market impact costs. Improving processing efficiencies and delivering cost reductions. Simplifying trade processing through multilateral settlement netting. Reducing errors & operational risks through automated straight-through-processing. Reducing legal and regulatory complexity through standardised agreements & processes. 4

5 Novation/Registration (1) LCH.Clearnet novates (legally registers) trades so that it is on risk and so that a bilateral trade with bilateral credit risk BUY $8 X Y SELL $8 becomes 5 LCH.Clearnet Group

6 Novation/Registration (2) A cleared trade with LCH.Clearnet as central counterparty, assuming the credit risk, BUY $8 BUY $8 X LCH.Clearnet Y SELL $8 SELL $8 meaning that X no longer faces Y s credit risk and vice versa 6 LCH.Clearnet Group

7 Multilateral Netting AAA AAA BBB CCC BBB 5 LCH CCC DDD EEE DDD EEE When trading on a bilateral basis, a participant may have exposure to several different counterparties, thus multiple credit lines with multiple counterparties. 7 A customer with a clearing account only has exposure to their clearing bank or the clearing house. Positions can be netted out, thus reducing the level of initial margin required.

8 Clearing for the Container Freight Swap Agreement The service falls under LCH s OTC Clearing service for commodities (EnClear), and uses the ECS system (already available to 25 LCH Clearing Members) Clearing is available for the 4 main routes: Shanghai to North Europe Shanghai to Med Shanghai to West Coast US Shanghai to East Coast US All contracts are monthly settled against indices published by the Shanghai Shipping Exchange (Shanghai Container Freight Index - SCFI) Clearing fees are US$ 3 per lot (one TEU or FEU) 8

9 Clearing in the Dry FFA market LCH.Clearnet launched clearing in Sep Clearing members offering client services Over 95% of reported volumes now cleared Screen trading and STP being introduced to add more transparency and efficiency to the market 9

10 10 Margining and Default Management

11 Purpose of Initial Margin For LCH.Clearnet to be holding sufficient funds on behalf of each Clearing Member to offset any losses incurred between the last payment of margin and the close-out of the member s positions should that member default 11

12 LCH.Clearnet Margining policy Represents estimated potential losses on a portfolio between last mark-to-market and close out of position within 2 days in case of a default Returnable deposit in respect of net open positions Rates set by LCH.Clearnet Risk Management Department: Taking account of current and expected volatility Reviewed monthly, with ad hoc reviews where increased volatility Main components: Outright margin rate (scanning risk), including tiered levels down the curve, dependant on volatility Inter-month spread offset Inter-commodity spread offset- ie between routes and possibly other commodities where price correlation is established 12

13 Variation Margin Variation margin represents profits and losses on open positions which are calculated daily by the mark-to-market process, which are then paid to or collected from the Clearing House on a daily basis 13

14 Backing (Default) Arrangements Defaulting clearing member s margin contributions Defaulting clearing member s Default Fund contribution Current year pre-tax profit of LCH.Clearnet Ltd to max 10m Default Fund (current around 580m) Insurance cover ( 200m, 100m for any single member default) Remaining assets of the Clearing House 14

15 Default procedures Seek to transfer client positions held in defaulting Members (DM) account to other clearing members where possible Client positions held in segregated accounts can generally be easily identified and therefore LCHC can seek to transfer on request from client and another LCHC clearing member Client positions held in Members non-segregated account may not be identifiable separately from the defaulting members positions held in their house account Close out/transfer DM s house and non-segregated positions trading out positions in the market transfer positions through Member auctions Client funds, held by LCH.Clearnet for DM s margins, are returned to DM s administrators, who will seek to return the funds to clients in due course 15

16 LCH.Clearnet s Overview of the Lehman Default The Lehman s default is the most complex and challenging default in LCH s history. LCH.Clearnet worked closely with market participants to ensure the orderly transition and management of positions with minimum impact on the market The vast majority of client requests to transfer derivative positions held in segregated and house accounts have been completed The equity and energy portfolios of Lehman positions were sold through auction LCH.Clearnet did not need to use the default fund in the management of the Lehmans default The success in managing the default demonstrates the robustness of LCHC s risk management procedures and the strength of its relationships with key market participants 16

17 Thank you