Managing Risk at EquityClear
Managing and mitigating risk is at the heart of everything we do here at EquityClear. Utilising LCH’s tried-and-tested risk management framework developed over decades, you can be confident that when you clear your trades with EquityClear you’re in safe hands.
EquityClear provides our Clearing Members and their clients with a safe and resilient clearing house well-prepared to weather the most turbulent of market conditions. In order to do this, our risk management framework is built upon three pillars:
- Stringent membership criteria: Any counterparty seeking to clear positions at EquityClear must first meet LCH’s rigorous eligibility requirements to become a member. This includes demonstrating they have the necessary financial resources and the competency to manage cleared positions before their membership is approved.
- Fully collateralised trades: All member positions are subject to both initial margin and variation margin requirements. While the former can be satisfied with either cash or government securities (subject to haircuts), variation margin calls must be met in cash to reflect mark-to-market changes in the value of positions. Regularly scheduled intraday margin calls provide further resiliency, allowing the clearing house to request additional collateral throughout the day.
- Robust default management: Should a Clearing Member default, trade collateralisation will limit the impact on non-defaulting members arising from the failure. Losses arising from any default first erode the defaulting party’s posted margin, followed by the defaulter’s contribution to the EquityClear default fund. Should the default exhaust these resources, then EquityClear’s own capital is allocated into the resolution.
Collateral Management
All trades cleared at EquityClear are required to be fully collateralised in order to reflect mark-to-market changes in the value of their cleared positions.
Initial margin requirements may be met with cash in certain currencies or highly-rated securities, subject to a haircut. Variation margin is calculated on a daily basis and must be met in cash.
EquityClear also conducts several intraday margin calls during the course of the trading day. This ensures that in volatile markets, the clearing house is holding sufficient collateral throughout the day, rather than being exposed to the gap risk of having to wait to make one large margin call the following day.
Acceptable Cash
Cash collateral can be posted in Euros, US Dollars or Sterling.
Acceptable Securities
The list of assets accepted by LCH SA to cover margin requirements can be found in Instruction IV.4-1.
Customer Protection at EquityClear
The protection of our members and their clients is paramount in all our thinking about collateral management at EquityClear.
EquityClear Ltd and SA offer three segregation options, for clients of the Clearing Member, that are compliant with the European Market Infrastructure Regulation (EMIR).
In accordance with the EMIR requirements we have made two omnibus-style segregation accounts available to Clearing Members at EquityClear, in addition to an individually segregated account option:
OSA Net: The OSA Net is a structure that commingles one or more clients’ positions and collateral, exposing your clients to some fellow customer risk. The initial margin for each set of positions is calculated as a single net liability allowing offsets between all the positions inside the structure. In a Clearing Member default, LCH treats your collateral value collectively, drawing on the value attributed to the account to meet all position losses. Pooled positions can be ported together to a backup Clearing Member along with the collateral value associated to the pool.
OSA Gross: The OSA Gross is a structure that commingles clients’ positions in a pool with those of other clients that you select. This mitigates fellow customer risk while giving you a controlled netting benefit. LCH can identify and potentially preserve the specified assets recorded into the pooled account. In a Clearing Member default, LCH can draw on these assets only to meet the pooled account's losses, not those of any other clients outside the pool. Pooled positions can be ported together to a backup Clearing Member along with the collateral assets associated to the pool.
The ISA account segregates clients positions and collateral assets from those of all other clients. The initial margin is calculated independently for your liabilities alone. LCH can identify and potentially preserve the specified assets recorded to your account. In a Clearing Member default, LCH can draw on these assets only to meet your losses, not those of any other clients. Your positions port individually to the backup Clearing Member of your choice, along with the collateral assets associated with your account.
Default Management
EquityClear’s default management procedures are in place to resolve the failure of the Clearing Member in the fastest manner possible with the minimum level of disruption to non-defaulting Clearing Members and capital markets as a whole.
We follow a clearly prescribed framework to ensure that all stakeholders are aware of our contingency procedures and are familiar with our process in the event that default procedures have to be activated.
EquityClear’s default management process follows three steps to reduce the risk of the defaulted firm’s outstanding positions without impacting other non-defaulting Clearing Members:
Risk Neutralisation & Client Porting: After a member default, EquityClear immediately begins the process to enable porting non-defaulting clients to solvent Clearing Members, when and where possible. Alongside this, within tightly defined timeframes, we assess the risks in the defaulter’s portfolio and take measures to minimise the risk and to liquidate the portfolio in a highly controlled manner and in a way that has the least possible impact on the market as a whole.
Loss Attribution: In the event that losses are greater than the financial resources of the defaulting Clearing Member and of LCH, the pre-funded Default Fund contributions of solvent EquityClear members are used.
Default Waterfall
EquityClear’s default waterfall establishes the order in which the financial resources of a defaulted Clearing Member, solvent Clearing Members and the resources of LCH itself are consumed during a default resolution.
A defaulting Clearing Member’s posted margin is the first asset to be consumed in managing the default, followed by the defaulter’s contribution to the EquityClear default fund.
If these assets prove insufficient to settle the default, LCH’s own capital is next in line for losses. It is only after all of these resources are exhausted that default fund contributions from non-defaulting Clearing Members are used to close out the portfolio.
In the extremely unlikely event that all waterfall resources are consumed and defaulted positions have not been fully auctioned, additional safety procedures will be triggered allowing the service to continue.
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