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DERIVATIVES-LCH expands repo clearing to German debt
March 28, 2017 / 1:22 PM / 9 months ago

DERIVATIVES-LCH expands repo clearing to German debt

LONDON, March 28 (IFR) - LCH has extended its repo clearing service to include German government debt, offering clients enhanced netting opportunities against existing cleared repo activities on the RepoClear platform.

The latest development adds to the French, Italian and Spanish cash and securities repo clearing service already offered by LCH SA - the Paris-based arm of the clearing firm. It covers government debt instruments that are settled through Target2 Securities (T2S) – the pan-European securities settlement platform. In addition to government securities, the initiative extends to German regional debt as well as jumbo Pfandbriefe.

The fourth T2S migration wave was completed last month, enhancing netting capabilities in the cleared repo market after a further six central securities depositories were brought on board, including Germany’s Clearstream.

Following the latest migration wave – the largest to date - 18 CSDs representing 16 markets are now settling securities transactions on the T2S platform.

“The implementation of T2S brings with it an opportunity to expand the number of European trades eligible for balance sheet netting, providing greater operational and capital efficiency for our members,” said Christophe Hemon, CEO of LCH SA. “It will also allow our members to benefit from potential margin savings thanks to risk offsets among four main European debts.”

RepoClear members can use Clearstream Bank or Euroclear France as their CSD, or Euroclear bank as the settlement agent. The addition of Frankfurt-based Clearstream into T2S is expected to dramatically improve netting opportunities in German sovereign bonds. Netting has become vital for banks to reduce balance sheet usage and mitigate costly capital requirements associated with Basel III rules that many believe have sapped liquidity from sovereign bond markets.

“There is clear evidence that the roll out of T2S will bring tangible benefits towards improving the infrastructure services required to support liquidity in the European sovereign bond markets,” said Michael Manna, head of EMEA and APAC fixed income financing at Barclays. “Clearing is both an efficient way for us to guard against counterparty risk and optimise balance sheet usage.”

In addition to the netting opportunities available against other eurozone government repo trades on the Paris-based platform, German cash and repo trades will also be cleared on the London-based RepoClear platform that includes government securities in the UK, Austria and Scandinavia.

“This initiative offers the choice between clearing venues and the ability to improve operational efficiency,” said Peter Fejfer Nielsen, head of EMEA finance desk at Citigroup. “It is an important step to incorporate T2S across European government debt markets and will improve settlement and support our client activity.”

LCH SA 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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