| Originating department: | SwapClear |
| Company Circular No: | LCH.Clearnet Ltd Circular No 2476 |
| Service Circular No: | SwapClear 062 |
| Date: | 12 June 2009 |
| To: | All SwapClear Clearing Members |
SwapClear: Revised Initial Margin Multipliers
Dear SwapClear Member,
Following a review of market liquidity LCH.Clearnet has revised the Initial Margin Multiplier trigger levels (IMM’s). These will go live on Monday 22nd June 2009 which means that calculations based on the new IMMs, and hence communications with affected members, will be made on Friday 26th June with any relevant additional margin being called for value 30th June.
The new multipliers have been derived following consultation with members using the approach introduced early last year.
Approach to determining new IMM’s
• In response to Member and Default Management Group feedback LCH.C issued a member questionnaire to gauge swap market capacity. This included a survey of anticipated additional liquidity cost to close out positions over and above the perceived capacity for major currencies;
• LCH.C Risk Management use a model to measure this cost for actual portfolios and also to scale sensitivity up to Worst Case Loss (WCL) thresholds;
• Both the model and the approach have been endorsed by the SwapClear Default Management Group (DMG).
Results
The new multiplier levels reflect the general market perception that market capacity / liquidity has decreased which has resulted in a reduction in the WCL thresholds. We have where possible ensured that there is a gradual accrual of additional margin. The results were presented and agreed with the DMG.
Following recommendations from the DMG the triggers will be henceforth set in local currency to avoid distortions from FX fluctuations. For comparison purposes the matrix below is set in GBP equivalent, however future communications with members will refer to WCL in local currency.
Previous and Revised Initial Margin Multipliers for the major currencies
| EUR | GBP | JPY | USD | |||||
| WCL (GBP mm) | OLD | NEW | OLD | NEW | OLD | NEW | OLD | NEW |
| - | 1.00 | 1.00 | 1.00 | 1.00 | 1.00 | 1.00 | 1.00 | 1.00 |
| 25 | 1.00 | 1.00 | 1.00 | 1.00 | 1.00 | 1.00 | 1.00 | 1.00 |
| 50 | 1.00 | 1.00 | 1.00 | 1.00 | 1.00 | 1.00 | 1.00 | 1.00 |
| 100 | 1.00 | 1.00 | 1.00 | 1.00 | 1.00 | 1.10 | 1.00 | 1.00 |
| 150 | 1.00 | 1.00 | 1.00 | 1.10 | 1.00 | 1.20 | 1.00 | 1.00 |
| 200 | 1.00 | 1.10 | 1.20 | 1.20 | 1.25 | 1.40 | 1.00 | 1.10 |
| 300 | 1.10 | 1.15 | 1.40 | 1.30 | 1.40 | 1.60 | 1.00 | 1.10 |
| 450 | 1.15 | 1.20 | 2.00 | 1.40 | 1.60 | 1.70 | 1.00 | 1.15 |
| 600 | 1.20 | 1.20 | 2.00 | 1.50 | 1.80 | 1.80 | 1.20 | |
| 750 | 1.25 | 1.25 | 2.00 | 1.60 | 2.00 | 2.00 | 1.15 | 1.20 |
| 900 | 1.25 | 1.30 | 2.00 | 1.70 | 2.20 | 2.00 | 1.20 | 1.25 |
Revised complete matrix for execution by currency from 22 June 2009
| WCL (GBP mm) | 0 | 25 | 50 | 100 | 150 | 200 | 300 | 450 | 600 | 750 | 900 |
| CHF | 1.00 | 1.00 | 1.00 | 1.00 | 1.50 | 1.50 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 |
| EUR | 1.00 | 1.00 | 1.00 | 1.00 | 1.00 | 1.10 | 1.15 | 1.20 | 1.20 | 1.25 | 1.30 |
| GBP | 1.00 | 1.00 | 1.00 | 1.10 | 1.10 | 1.20 | 1.30 | 1.40 | 1.50 | 1.60 | 1.70 |
| JPY | 1.00 | 1.00 | 1.00 | 1.10 | 1.20 | 1.40 | 1.60 | 1.70 | 1.80 | 2.00 | 2.00 |
| USD | 1.00 | 1.00 | 1.00 | 1.00 | 1.00 | 1.10 | 1.10 | 1.15 | 1.20 | 1.20 | 1.25 |
| AUD | 1.00 | 1.50 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 |
| CAD | 1.00 | 1.00 | 1.00 | 1.00 | 1.50 | 1.50 | 1.50 | 2.00 | 2.00 | 2.00 | 2.00 |
| DKK | 1.00 | 1.00 | 1.50 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 |
| HKD | 1.00 | 1.00 | 1.50 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 |
| NOK | 1.00 | 1.50 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 |
| NZD | 1.00 | 1.50 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 |
| PLN | 1.00 | 1.50 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 |
| ZAR | 1.00 | 1.50 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 |
| SEK | 1.00 | 1.00 | 1.50 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 |
Total Initial Margin Multiplier
| Total Initial Margin (GBP mm) | 0 | 25 | 50 | 100 | 150 | 200 | 300 | 450 | 600 | 800 | 900 |
| Total IM Multiplier | 1.00 | 1.00 | 1.00 | 1.00 | 1.00 | 1.00 | 1.00 | 1.00 | 1.00 | 1.50 | 2.00 |
Please do not hesitate to contact the Rates Team, Risk Management, or Martin Hadfield if you require any further details.
| Martin Hadfield | |
| Rates Team | Commercial Services |
| Risk Management | SwapClear |
| LCH.Clearnet Limited | LCH.Clearnet Limited |
| +44 (0)20 7426 7428 | +44 (0)20 7426 7608 |
| ratesteam@lchclearnet.com | martin.hadfield@lchclearnet.com |