LONDON (Reuters) - European clearing house LCH.Clearnet has doubled its margin requirement on Irish government bonds to 30 percent of net positions, citing higher Irish yields over triple-A benchmarks such as German debt.
The move came just a week after the clearing house increased the margin requirement to trade Irish sovereign debt by 15 percent after the 10-year yield gap over German benchmarks ballooned to euro lifetime peaks above 650 basis points, exceeding LCH.Clearnet’s threshold of 450 bps.
However, there was no need to raise the margin requirement on Portuguese government bonds, LCH.Clearnet’s head of fixed income, John Burke, told Reuters in a telephone interview.
Portuguese 10-year bond yield spreads over German debt remain near 450 bps, having jumped to a euro era high of 470 bps last week on contagion from Ireland.
The additional margin on Irish bonds would be charged on net exposure at close of business on November 18, LCH.Clearnet said, and came after the Irish yield gap over triple A-rated benchmarks traded consistently over 500 bps.
“LCH.Clearnet Ltd has revised the risk parameters for Irish government bonds cleared through the RepoClear service. The total margin required for positions of Irish government bonds will consequently be 30 percent of net positions,” it said in a statement on its website.
LCH.Clearnet clears Irish government bonds on behalf of its investment bank clients and has an 80 percent share of the total clearing business in Europe.
Eurex, which has a 15 percent share of the European clearing market while LCH.Clearnet holds the rest, said in a notice on its website on Monday it would raise the minimum margin on trades in Irish and Portuguese debt to 20 percent from 15 percent with effect from Thursday.
The 10-year spread over German Bunds rose by nine bps on the day to an intra-day peak of 597 bps on Wednesday, on market uncertainty whether Dublin would apply for EU aid after a finance ministers’ meeting ended on Tuesday without a deal.
“Sentiment and price action is being driven very much by expectations of an impending bailout package,” ICAP economist Don Smith said. “Take that away and this announcement would have very likely have represented another catalyst that escalates the sovereign debt crisis further - Ireland would have been hit very hard today.”
The cost of protecting against an Irish debt default rose on Wednesday, with five-year credit default swaps widening by 20 bps to 540 bps, according to CDS prices from Markit.
“We don’t and we continue not to have a view on the credit worthiness of Ireland .... All we seek to do is manage the risk that we see today,” Burke said.
Clearing houses, such as LCH.Clearnet, collect cash in the form of margin on individual trades and default fund contributions, which they hold centrally to refund members left out of pocket in the event of a default.
Additional reporting by William James; Editing by Toby Chopra/Ruth Pitchford