LCH has gone live with a new account structure allowing buy-side clients to post collateral directly with the clearing house, and has secured Aviva Investors as its first client.
Through its new CustodialSeg account, asset managers would retain beneficial title to the collateral, and will be segregated at an international central securities depository (ICSD).
“Being able to lodge collateral direct with LCH is a positive step as it allows us to manage our collateral delivery more effectively and to ensure our assets remain identifiable as ours, while lodged at the CCP,” said Barry Hadingham, head of derivatives and counterparty risk, Aviva Investors.
JP Morgan has signed up as the first clearing member and custodian to the use the new account type, and Euroclear bank as the first ICSD.
LCH also stated BNP Paribas and HSBC have confirmed their readiness to support the new account structure.
“The launch of CustodialSeg is a key development for the industry, providing buy-side firms with further options of how to protect their assets, a major point of concern for many firms. Any solutions that enable clients to seek increased protection of their assets providing them with flexibility to partner with their custodians to efficiently manage their collateral are encouraged,” said Raphael Masgnaux, global head of prime solutions and financing, BNP Paribas.
LCH stated the account structure is available for eligible SwapClear clients based in the UK and the Netherlands.
As a result of stricter capital rules for banks holding cash collateral on their balance sheet, it has forced asset managers to find alternative ways to connect to clearing houses and post non-cash collateral to avoid higher costs
Earlier this year, Phil Whitehurst, global head of service development at LCH, told an audience at The TRADE Derivative’s “Future of Post Trade” event that the clearing house is looking to work with market participants to ease requirements on cash collateral.
“From a processing point of view, some [firms] find it easier to deliver one or the other [cash or non-cash]. We’re working towards more efficient delivery channels for non-cash initial margin so firms can keep cash for other essential purposes,” said Whitehurst.
The launch of the new account follows similar moves among other clearing houses to open up direct channels with the buy-side, following significant withdrawal from banks in the clearing process.
CME Group planned to launch its Direct Funding Participant model in the first quarter, similar to LCH’s CustodialSeg model, however its go-live has been pushed again to late 2017.