LCH (clearing house)
|Headquarters||London, United Kingdom|
|Owner||London Stock Exchange Group (60%)|
LCH is a European-based independent clearing house that serves major international exchanges, as well as a range of OTC markets. Based on 2012 figures LCH cleared approximately 50% of the global interest rate swap market, and is the second largest clearer of bonds and repos in the world, providing services across 13 government debt markets. In addition, LCH clears a broad range of asset classes including: commodities, securities, exchange traded derivatives, credit default swaps, energy contracts, freight derivatives, interest rate swaps, foreign exchange and Euro and Sterling denominated bonds and repos.
LCH's members comprise a large number of the major financial groups including almost all of the major investment banks, broker dealers and international commodity houses. LCH, being a clearing house, sits in the middle of a trade assuming the counterparty risk involved when two parties trade guaranteeing the settlement of the trade. To mitigate the risks involved it imposes certain minimum requirements on its members and collects initial and variation margin (or collateral) from them for trades that have been executed.
- 1 History
- 2 Products
- 3 Regulation
- 4 See also
- 5 References
LCH traces its roots back to the London Clearing House, established in 1888, and the Paris-based Clearnet, established in 1969. Both developed from clearing commodity transactions. They merged in 2003 and London Stock Exchange Group acquired a majority stake in the business in 2013.
London Clearing House
- 1888 - The London Produce Clearing House (LPCH) is established to clear commodities contracts in London. Shares are in public ownership and the company is listed on the London Stock Exchange.
- 1951 - LPCH is wholly acquired by United Dominions Trust.
- 1971 - The company is renamed the International Commodities Clearing House ICCH.
- 1980 - Ownership passes to a consortium of six British Banks.
- 1992 - ICCH divests the clearing software business to Sungard and is renamed the London Clearing House Ltd (LCH).
- 1996 - Majority ownership of LCH transfers to the whole clearing membership, with the LME, IPE and LIFFE acquiring minority ownership.
- 2003 - LCH.Clearnet Group is formed following the merger of the London Clearing House and Clearnet SA.
- 1969 - Banque Centrale de Compensation SA is established to clear contracts traded in Paris commodity markets.
- 1990 - Banque Centrale de Compensation SA becomes a subsidiary of MATIF, and is the first organisation in Europe to clear both cash and derivatives.
- 1998 - Bourse de Paris takes control of MATIF. Clearnet launches a clearing service for French government securities and is the first organisation in Europe to permit remote clearing.
- 1999 - Restructuring of the French markets, all the regulated markets in Paris are run by a single body, the Société des Bourses Francaises, trading under the name of Euronext Paris. Clearnet is spun off as a subsidiary of Euronext and becomes the clearing house for all products traded in the Paris markets.
- 2000 - Euronext is established through the merger of Bourse de Paris, the Amsterdam Exchanges and the Brussels Exchanges.
- 2001 - Clearnet merges with Euronext Amsterdam's and Euronext Brussels' Clearing Houses.
- 2003 - Euronext Lisbon contributes its derivative and OTC equity clearing businesses to Clearnet which thus acquires a branch in Portugal to establish a local presence with Portuguese clearing members.
- 2003 - LCH.Clearnet Group is formed following the merger of the London Clearing House and Clearnet SA.
- 2003 - LCH.Clearnet Group is formed following the merger of the London Clearing House and Clearnet SA. New ownership comprises: Clearing Members 45.1%, Exchanges 45.1%, Euroclear 9.8%.
- 2007 - LCH.Clearnet and Euronext announce repurchase by LCH.Clearnet of shares held by Euronext to more closely align customer and shareholder interests. Revised ownership comprises: Clearing Members 73.3%, Exchanges 10.9%, Euroclear 15.8%.
- 2008 - LCH.Clearnet successfully resolves $9 trillion of Lehman Brothers OTC interest rate swap defaults.
- 2009 - US office opened.
- 2009 - Dormant shareholders are retired and shareholders are given the option to reduce or exit their holdings. Revised ownership comprises: Clearing members 82.85%, Exchanges 17.15%.
- 2012 - The London Stock Exchange gets enough support to acquiring a 60% stake in LCH.Clearnet with an offer of €19 per share, giving LCH.Clearnet a valuation of €813 million (£677 million/ $1.1 billion).
- 2012 - LCH.Clearnet acquired sole ownership of International Derivatives Clearing Group, LLC from the NASDAQ OMX Group, Inc. and certain other investors. IDCG became a U.S. subsidiary of LCH.Clearnet, reinforcing LCH.Clearnet’s presence in the U.S. marketplace, where it already operated IRS clearing through its SwapClear service.
- 2013 - London Stock Exchange Group acquired a majority stake in the business.
LCH has over 100 years experience clearing commodities, and provides clearing and settlement services for both the exchange traded and the OTC commodity markets. LCH clears commodities including non-ferrous metals (100 million metal trades are cleared annually), plastics and steel which are exchange traded on the London Metal Exchange, as well as a broad range of futures and options contracts covering soft and agricultural products. It also clears over-the-counter products including gold, coal, steel and iron ore and fertilizer swaps.
Credit Default Swaps
In 2012, LCH launched its international CDSClear service, working with a further 10 international institutions in addition to the four French member banks. This builds on the previous service which initially covered European indices. The CDS service provides full STP multilateral clearing, reduced counterparty risk and post-trade anonymity and encompasses the core requirements as determined by key industry and policy groups, including ISDA, CESR, the ECB and the European Commission. The service also allows members a flexible set of facilities to manage their non-cash collateral placed at LCH.
LCH is the largest and only user-owned and user-governed global supplier of clearing services to the derivatives markets. This is either directly to the user community or by operating the clearing process on behalf of a third party via an insourcing arrangement, providing services to clients for Short Term Interest Rates (STIRs), Indexes and Equity derivatives.
LCH provides clearing services to clients for OTC Emissions trading and the US electricity trading on the Nodal Exchange (the first independent electronic commodities exchange offering locational forward trading products and services to participants in the organised North American power markets). LCH also provided services for Bluenext Futures EUA and Bluenext Futures CER, and today future contracts on EU Allowances and on Certified Emission Reductions.
EquityClear, LCH’s equity clearing service, offers clearing for equities and equity equivalents such as exchange traded funds (ETFs), exchange traded commodities (ETCs), real estate investment trusts (REITS) and exchange traded bonds. LCH clears equity-based trades that are executed on the London Stock Exchange (LSE), SIX Swiss Exchange, BATS Chi-X Europe, NYSE Euronext, Bourse de Luxembourg and Equiduct.
Centrally cleared CFDs
LCH was the first in Europe to launch a clearing service for contracts for difference (CFDs) and the first clearer globally to offer CFD clearing for institutional investors. CFDs were first launched in the UK in the early 90s as a short access product. Since then their use has grown across the world.
LCH’s centrally cleared CFD (ccCFD) service, in conjunction with Chi-X Europe, are an alternative to the traditionally over-the-counter traded CFDs and is line with the European Commissions’ aim to increase the proportion of cleared OTC contracts.
LCH has been working with fixed income markets since 1998, and provides clearing services covering French, Italian and Spanish Government debts, on cash and repo transactions traded by financial institutions including Euro-MTS, MTS-France, MTS Italy, ICAP (BrokerTec) and Tullett Prebon, and trade providers such as the Euroclear Trade Capture and Matching System (EUROCLEAR’s matching system), and Viel/Tradition.
LCH’s RepoClear service was established in partnership with leading banks in 1999, as the first multi market centralised clearing and netting facility for some 13 European government repo and cash bond markets, and a range of pan-European €GC Baskets. As of 2012 monthly volumes averaged c. €13 trillion, and RepoClear clears cash bond and repo trades in the following markets: Austrian, Belgian, Dutch, German, Irish, Finnish, Portuguese, Slovakian, Slovenian, Spanish and UK government bonds. Additional markets served include: German Jumbo Pfandbriefe and Supranationals, Agency and Sovereign. There are €12 trillion repo trades per month (based on nominal value) cleared through LCH.
LCH’s Freight service was launched in September 2005 with the support of the freight broking community. It provides an independent clearing service for the registration of OTC Forward Freight Agreements (FFAs) for the most actively traded routes; thirteen dry and ten wet routes, as well as options on the four dry timecharter routes: Capesize, Panamax, Supramax and Handysize.
In June 2010 LCH, as a member of the Container Freight Derivatives Association, launched a clearing service for the containerised freight market. The service provides an independent clearing service for the registration of OTC Container Freight Swap Agreements (CFSAs) for four of the most actively traded routes out of Shanghai.
Interest Rate Swaps
SwapClear is a global clearing service for OTC interest rate swaps, and currently clears more than 50% of the global notional market. Launched in 1999, SwapClear initially cleared plain vanilla interest rate swaps in four major currencies. Today it clears swaps in 17 currencies; USD, EUR, and GBP out to 50 years, AUD, CAD, CHF, SEK and vanilla JPY out to 30 years and the remaining 9 currencies out to 10 years. It also clears OIS out to 2 years in USD, EUR, GBP and CHF. To date, over 2 million trades in SwapClear have an aggregate notional principal amount of over $316 trillion.
In September 2008, LCH successfully managed Lehman Brothers’ US $9 trillion interest rate swap default, comprising over 66,000 trades, by implementing SwapClear’s default management process. The default was fully resolved well within the margin held and at no loss to other market participants.
In December 2009 SwapClear launched a new Client Clearing Service, a first for the buy-side community to access clearing interest rate swaps. The service offers unique levels of security to clients and has added functionality to support the segregation of client portfolios and margin.
Since the Lehman Brothers collapse, market weaknesses have been under intense scrutiny from financial institutions and regulators alike, and therefore financial markets are currently undergoing a period of unprecedented regulatory reform. A key area of proposed legislation is mandatory central clearing for some OTC derivative instruments, including foreign exchange. After in-depth research and analysis of the FX derivatives market and its inherent risks, LCH launched a new custom-built non-deliverable FX forward (NDF) clearing solution, ForexClear. ForexClear covers the most actively traded currencies in the NDF marketplace. Subsequent phases of development will include a broader range of currencies and tenors, along with additional OTC foreign exchange products such as NDOs, FXOs, NDF crosses, Forwards and Swaps.
LCH is regulated or overseen by the national securities regulator and/or central bank in each jurisdiction from which it operates.
- Regulated as a Compagnie financière by the Autorité de Contrôle Prudentiel et de Résolution (France).
- Regulated as a Derivatives Clearing Organization by the US Commodity Futures Trading Commission.
- Regulated as a Recognised Clearing House by the UK Financial Conduct Authority (FCA). Payment systems are overseen by the Bank of England.
- Regulated as a Credit Institution and Clearing House by a regulatory college consisting of the market regulators and central banks from the jurisdictions of: France, Netherlands, Belgium and Portugal.
- Regulated as a Recognised Overseas Clearing House by the UK Financial Conduct Authority.
- "SwapClear hits $1 trillion mark for buy-side OTC clearing". Risk.net. June 1, 2012.
- "LSE wins control of LCH.Clearnet". The Telegraph. April 2, 2012.