LONDON, Sept 14 (IFR) - LCH has opened its repo clearing platform to buyside firms through a new sponsored access model that aims to eliminate recent dislocations in the mechanism by which collateral is moved around the system.
Acting for a UK pension fund, Insight Investment has become the first asset manager to clear a repo trade on LCH’s RepoClear platform. NatWest Markets acted as the sponsor, providing default fund contributions and facilitating margin payments for its client.
Repo markets have come under stress in response to post-crisis reforms that mean the full notional amount of a repo transaction is included on the balance sheet of a broker. By bringing buyside repo trades into a central counterparty clearinghouse, dealers will benefit from a reduction in the heavy capital exposure associated with the trades.
“Broadening the number of clearing members in this way maintains the robustness of CCP risk management, creates the opportunity for greater balance sheet netting, benefits leverage ratio, and increases overall repo market capacity,” said Brian Shanahan, head of clearing and margin strategy at NatWest Markets, which has worked closely with LCH to provide long-term repo clearing for customers.
The sponsored model enables buyside firms to access the clearinghouse directly, with clearing agents providing financial guarantees and services for their buyside clients. The model has emerged as a preferred solution for concerns around increased credit risk that could be created in the clearinghouse through inclusion of non-bank members.
Mark Stancombe, head of corporate and product strategy at Insight Investment, said the new service is ground-breaking for the asset management community, enabling clients to benefit from efficient implementation of their investment strategies.
“It deepens and diversifies repo liquidity and will benefit our pension fund clients by providing efficiencies for them in comparison to non-cleared repo,” he said in a statement.
LCH’s sponsorship model is initially available for the 11 government debt markets cleared by London-based LCH, with plans to expand the capabilities to its Paris arm, LCH SA, subject to regulatory approval.
According to Bruce Kellaway, global head of RepoClear, EquityClear and Collateral at LCH, the expansion of repo clearing services is an important step for fixed income markets and buyside firms in particular, “enabling firms to reduce their risk and maximise balance sheet efficiencies”.
LCH is not alone in its efforts to bring buyside firms into the cleared environment. DTCC saw the first buyside trade on its tri-party repo platform earlier this year, between Citadel and Morgan Stanley. While DTCC’s direct-member service enables buyside firm to clear trades where they act as cash lenders, the US firm also received SEC approval for an expansion of its sponsored member programme.
Eurex Clearing launched its own sponsored access programme, ISA Direct, last year. The service allows buyside firms to clear repo trades with clearing agents covering default fund contributions, default management and some financing functions. (Reporting by Helen Bartholomew)