DERIVATIVES-SEC approves LCH for single-name CDS clearing

By Helen Bartholomew

LONDON, Jan 20 (IFR) - The SEC has authorised LCH's creditdefault swap clearinghouse, CDSClear, as a registered clearingagency, enabling the Paris-based platform to offer single-nameCDS clearing to US clients through futures commission merchants.

CDSClear is the first European CCP to be approved by boththe SEC - which oversees security-based swaps includingsingle-name CDS, and the CFTC - which oversees broad-based swapsincluding index CDS. CDSClear was authorised by the CFTC forindex contracts in 2013 and gained EU approval under theEuropean Markets Infrastructure Regulation in 2014.

"With the impending clearing mandate for CDS, our effortshave been focused primarily on Europe and onboarding as manyclients as possible, but the ability to onboard US clients willallow us to build a truly global service," said Frank Soussan,global head of CDSClear at LCH. "Our offering for US persons waspreviously limited to indices, but now we can offer the fullservice with the broadest coverage of single names."

For the SEC, the registration was something of a landmark,representing the regulator's first approval of a clearing agency since 1984. All other clearing registrations since, includingfor the InterContinental Exchange that dominates CDS clearing,have been grandfathered.

"We've been in regulatory discussions for around two yearsand have worked closely with the SEC to obtain our registration.This approval will help to boost competition in single-name CDSclearing," said Soussan.

PRODUCT BREADTH

For CDSClear, which is part of Paris-based LCH SA -currently the subject of a £510m planned takeover by Euronext -the approval could play a key role in its attempts to breakICE's stranglehold in CDS clearing.

ICE has cleared more than US$80trn in index and single namecontracts through ICE Credit Clear and ICE Clear Europe sinceits 2009 launch. CDSClear has cleared just 961bn of grossnotional since launch in 2012, but volume and market share havebeen rapidly growing.

Despite the lack of a regulatory mandate forcing single-nameCDS into clearing, volumes have jumped in response to unclearedmargin rules that came into force for the largest financialinstitutions in September. Under the new rules, contracts thatare not cleared by central counterparties are subject to initialand variation margin, hiking the cost of bilateral exposures anddriving a voluntary shift to clearing.

Cleared single-name volumes on CDSClear more than quadrupledin 2016 to 125bn notional, the majority of which came aftermargin rules came into force in September.

According to Soussan, The firm's market share in Europe hasjumped from under 1% two years ago to as much as 25%-30% on somedays. That growth has been supported by a broad product rangeand a single clearing framework that spans jurisdictions.

In addition to single-name constituents of key indicesincluding CDX and iTraxx, CDSClear also offers clearing onsenior financial names.

"Our product coverage has attracted the attention of USasset managers who frequently trade US and European names.Through CDSClear they can do that in a single framework" saidSoussan. "Our unique coverage of senior financials has helpedour market share, as banking names are among the most frequentlytraded."

In September 2016, for example, the CCP cleared more than1bn gross notional on Deutsche Bank credit protection,capturing 100% market share on that name.

BUYSIDE EFFORTS

Buyside volumes have also been supported by a group of 24global asset managers, including BlackRock, Citadel and EatonVance, which pledged a year ago to clear single-name contractsas part of a wider effort to revive flagging liquidity in theproduct.

Attempts to attract more buyside firms into clearing sawCDSClear offer "Select Membership" to non-dealer firms lastyear. Select members must meet all direct membership criteriabut are exempt from mandatory end-of-day price contributions - amajor hurdle for non-market makers that are typicallyprice-takers.

Select members are also only required to bid on packagesthat they actually trade in the event of an auction stemmingfrom a member default. Two clients have already signed up forthe service, with one up and running, while an range ofnon-dealer firms have shown interest. (Reporting by Helen Bartholomew; Editing by Ian Edmondson)