March 22, 2017 / 12:42 PM / 4 months ago

DERIVATIVES-LCH kick-starts client CDS clearing with Amundi

LONDON, March 22 (IFR) - Amundi has become the first European buyside client to begin clearing credit default swaps through CDSClear, LCH’s Paris-based clearinghouse.

The investment firm, which manages over €1trn of assets globally, is clearing index and single-name CDS trades on the platform, via broker BNP Paribas. A further two clearing brokers are planning to offer the service to their clients during the second quarter.

The latest development comes almost four years after the InterContinental Exchange began offering client CDS clearing in Europe, and is the latest step as LCH plays catch-up with its larger US rival.

ICE has cleared more than US$87trn gross notional of index and single-name contracts since 2009 across its European and US platforms – including US$26trn from buyside firms. CDSClear, which began operations in 2012, has cleared just over €1trn of CDS notional.

Although CDSClear has had the technical capabilities to offer clearing to buyside clients for some time, the launch reflects growing demand as end-user firms seek enhanced counterparty risk management and improved capital and operational efficiencies amid a tightening regulatory environment.

“We are committed to offering our customers a comprehensive product offering to effectively manage risk, and this approach is proving popular among market participants looking to realise the benefits of clearing,” said Frank Soussan, global head of CDSClear.

From September, the cost of uncleared over-the-counter swaps is set to increase as all financial firms will be required to post variation margin against trades that are not cleared through central counterparties.

For Amundi, LCH’s portfolio margining capabilities were a key consideration, providing the firm with the ability to offset risk of correlated contracts and make margin savings.

“Risk management is a top priority for us and our investors, and by clearing through LCH we are able to benefit from an experienced and robust CCP, that proved instrumental in accompanying us on mandatory clearing,” Emmanuel Gaffet, head of dealing risk management at Amundi, said in a statement.

Amundi was already a client of LCH, clearing its interest rate swaps through the SwapClear service.

The most liquid CDS credit index contracts are mandated for clearing under the European Markets Infrastructure Regulation and Dodd-Frank in the US. The SEC has yet to finalise similar rules that would force single-name contracts into clearing.

In December 2015, however, a group of 24 investors signed a commitment to clear single name CDS trades voluntarily, as part of a wider attempt to bolster liquidity in the asset class. Until now, they have had little choice over clearing venues.

“This launch is an important development for us and the industry as it gives buyside firms more choice of where to clear their CDS contracts, following the introduction of the non-cleared margin requirements and credit clearing mandate in Europe,” said Raphael Masgnaux, global head of prime solutions & financing at BNP Paribas.

Through CDSClear, LCH clears 124 index series and more than 480 single-name CDS, including financials. Earlier this year, the French clearinghouse was authorised as a registered clearing agency by the SEC, enabling the firm to offer single-name CDS clearing to US clients through futures commission merchants.

As part of LCH SA, CDSClear is subject to a possible acquisition by Euronext. The pan-European exchange has agreed to take control of LCH SA for £510m in the event of a successful takeover of the London Stock Exchange Group, LCH's parent, by Deutsche Boerse.

That US$14bn deal appears to be on the brink of failure, however, with the CDS clearinghouse set to remain in LCH's grip after LSEG refused to bow to regulatory pressure to offload its Italian bond trading platform, MTS. A formal decision is due on April 3. (Reporting by Helen Bartholomew)

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