Overview
The LCH robust risk management framework – underpinned by a team of over 50 dedicated risk managers – affords exceptional levels of protection to clearing members.
Initial and variation margin is collected from LCH members; should they fail, this margin is used to fulfil their obligations.
The amount of margin is decided by LCH risk management teams, who assess a member's positions and market risk on a daily basis.
PAIRS
LCH's proprietary Portfolio Approach to Interest Rate Scenarios (PAIRS) margin methodology is used for the calculation of margin for OTC interest rate derivatives, foreign exchange derivatives and listed rate derivatives cleared at LCH:
- SwapClear
- Listed Rates
- ForexClear
PAIRS is an expected shortfall value-at-risk (VaR) model based on filtered historical simulation incorporating volatility scaling. The model uses ten years of historical market data to simulate changes in portfolio value from which an estimate of the potential loss distribution is calculated.
In addition to PAIRS initial margin, LCH applies margin add-ons covering Credit Risk and Liquidity Risk where a particular member's inherent risk exposure is not captured within the PAIRS model.