Assessment of LCH Limited's SwapClear Service Appendix B: Risk Management, Governance and the LCH Limited Regulatory Environment

B.1 Risk Management

A CCP acts as the buyer to every seller, and the seller to every buyer in a market. This is commonly achieved by the CCP interposing itself as the legal counterparty to all purchases and sales via a process known as novation. These arrangements provide substantial benefits to participants in terms of counterparty credit risk management as well as greater opportunities for netting of obligations. However, these arrangements result in a significant concentration of risk in the CCP. This risk can crystallise if a clearing participant defaults on its obligations to the CCP, since the CCP must continue to meet its obligations to all of the non-defaulting participants. LCH Ltd manages this risk in a number of ways, including through participation requirements, margin collection, the maintenance of pooled resources and loss allocation arrangements.

B.1.1 Clearing participation requirements

To limit its exposure to its participants, LCH Ltd only allows institutions to become SwapClear clearing participants if they meet certain financial and operational requirements at the time of admission and on an ongoing basis. Clearing participants of SwapClear are required to have net capital of at least US$50 million, as well as appropriate payment arrangements, staff with sufficient experience, and systems to manage their clearing activities. Participants must also demonstrate their operational capability to participate effectively in default management processes, including their ability to value and bid on the portfolio of a defaulting participant.

B.1.2 Margin collection

LCH Ltd covers its credit exposures to SwapClear participants by collecting several types of margin:

  • Initial margin. LCH Ltd requires clearing participants to post initial margin on all positions. Initial margin requirements aim to cover the risk of a fall in the value of a participant's outstanding portfolio during the expected close-out period should that participant default. LCH Ltd collects various forms of additional initial margin to cover any risks – including credit, liquidity, concentration and sovereign risks – not captured by the base initial margin model.
  • Variation margin. All SwapClear positions are marked-to-market on at least a daily basis. Variation margin is collected from clearing participants that have experienced a mark-to-market loss and paid to those with a mark-to-market gain.

LCH Ltd calls initial and variation margin at the end of each business day. Additionally, LCH Ltd monitors participants' portfolios intraday to take account of changes in both prices and positions. LCH Ltd makes margin calls intraday if a participant's combined margin liability exceeds a predetermined participant-specific credit threshold. Margin is not paid out intraday to participants whose margin requirements have fallen. Further, most trades will only be registered if, at the point of registration, there are sufficient pre-funded resources posted by the participant to cover the risk of default.[25]

LCH Ltd calculates initial margin requirements for SwapClear using its Portfolio Approach to Interest Rate Scenarios (PAIRS) model. The model sets initial margin requirements to cover potential losses over a five-day close-out period for participants' positions with 99.7 per cent confidence, based on volatility-scaled historical movements in yield curves and exchange rates over a 10-year lookback period. LCH Ltd also imposes a floor on initial margin requirements based on an unscaled historical 10-year lookback period plus an additional 2½-year window covering the global financial crisis. This is to prevent initial margin requirements falling during periods of low volatility. LCH Ltd assumes that an additional two-days (seven days in total) will be required to close out the positions of clients of participants; initial margin requirements and the floor for initial margin requirements on the positions of clients are therefore scaled up accordingly.[26] LCH Ltd assesses the performance of its margin model through daily and monthly backtesting. LCH Ltd also assesses the adequacy of the model assumptions through monthly sensitivity analysis and performs annual model validation reviews of the PAIRS model and individual margin add-ons.

B.1.3 Pooled financial resources

In the event of a clearing participant default, any losses would first be covered by the margin and other collateral posted by the defaulter across all LCH Ltd services in which it participated.[27] Should these resources prove insufficient to meet LCH Ltd's obligations, LCH Ltd may draw on other resources in the Rates service default waterfall. The Rates service default fund covers the SwapClear and Listed Rates services, as LCH Ltd allows for portfolio margining between these services.[28] The available resources are depicted in Figure 1, which shows the order in which financial resources would be used to cover default losses in excess of the defaulter's collateral.

Figure 1
Figure 1: Rates Service Default Waterfall

Prefunded resources

The Rates service default fund is a pool of mutualised financial resources, prefunded by clearing participants. The Rates service default fund comprises two components: a core component and an additional component that supports the intraday provision of credit needed to facilitate real-time trade registration (RTTR) (see ‘Default fund real-time trade registration component’ below). Both components are available to cover losses from participant defaults. Both SwapClear and Listed Rates participants contribute to the core component, but only SwapClear participants contribute to the RTTR component.

In the event that all of the defaulting clearing participant's margin and other collateral, including its contribution to the Rates service default fund, were exhausted, LCH Ltd would allocate remaining losses arising from the default to its own capital contribution in the default fund waterfall (€67.6 million as at 30 September 2020). Should this also prove insufficient, losses would be allocated to the non-defaulters' contributions to the Rates service default fund.

Default fund core component and default fund additional margin

The core component of the default fund is calibrated to cover any losses LCH Ltd would incur if the two clearing participants (including their affiliates and clients) with the largest exposures defaulted under extreme but plausible conditions, after using the defaulters' total initial margin (including add-ons). This is intended to meet the ‘cover two’ requirement under CCP Standard 4.4 and its equivalent under EMIR.

The core component of the default fund is resized on the first business day of each month. LCH Ltd calculates this by summing the largest two participant stress test losses over initial margin (STLOIM) over a 60-day lookback period, adding a buffer, and then subtracting the amount of monthly default fund additional margin (DFAM) called.[29]

Each SwapClear participant's contribution to the core component is equal to its average share of total STLOIM for both house and client positions over the previous month. The share of each participant's stress test losses is adjusted according to the portability of each of its clients' portfolios.[30]

Contributions to the core component are subject to a minimum of £17.5 million for SwapClear participants who are also Listed Rates participants, £10 million for SwapClear-only clearing participants and £500,000 for Listed Rates-only clearing participants. Contributions are rebalanced each month when the core component is resized. Following a resize, participants are informed of their new contributions on the third business day of the month, and payments are due the following day if their contribution has changed.

LCH Ltd uses monthly DFAM to achieve a balance between defaulter-pays and mutualised resources, ensuring that participants with large exposures relative to other Rates service members provide larger contributions to the resources required to cover those exposures. Monthly DFAM is called from the largest participant if its STLOIM exceeds a specified threshold of the value of the default fund, determined by its internal credit score (ICS). Monthly DFAM is not mutualised; it can only be used to cover losses from the participant that posted it.

LCH Ltd also calls daily DFAM from those participants with STLOIM that exceed a predefined proportion of the default fund. This predefined default fund proportion is based on the participant's ICS. The amount of daily DFAM called is the difference between the participant's STLOIM and the relevant proportion of the default fund on that day, less any monthly DFAM. Like monthly DFAM, daily DFAM is not mutualised; it can only be used to cover losses from the participant that posted it. Participants can ask clients to cover their own stress test losses (rather than the participant paying DFAM) through ‘stress loss margin’ (SLM).

Graph 14
Graph 14: Rates Service: Default Fund and Stress Test Losses

Over the assessment period, LCH Ltd maintained sufficient financial resources to meet the cover two requirement (Graph 14). That is, STLOIM less daily and monthly DFAM of the two participants with the largest exposures were smaller than the default fund core component. The total Rates service default fund was operating at its cap of £6 billion (£5.4 billion core component and £600 million RTTR component) throughout the assessment period. Where the cap is binding, LCH Ltd maintains sufficient prefunded financial resources to meet its cover two requirement by collecting DFAM, as described above.

Default fund real-time trade registration component

To meet European regulatory requirements, SwapClear must novate or reject new trades within 10 seconds. Trades are novated if the incremental margin requirement arising from the trade is covered by collateral lodged by that participant, or is below a tolerance limit set by LCH Ltd. LCH Ltd assigns these tolerance limits to participants based on their ICSs. By extending credit to participants through tolerance limits, the frequency with which LCH Ltd can register trades is not necessarily restricted by the frequency with which LCH Ltd can collect margin.

LCH Ltd mitigates the credit risk that arises from offering trade registration tolerance limits through an additional £600 million RTTR component in the default fund. The proportion of each SwapClear participant's contribution to the RTTR is based on their prior utilisation of their RTTR limit relative to that of other participants over the previous 20 business days, subject to a floor of £4 million and a cap of £30 million. Listed Rates-only participants do not contribute to the RTTR component of the default fund. Participant contributions to the RTTR are rebalanced on the same timeline as those of the core component of the default fund. Usage of the RTTR is limited on a cover two basis, which means that no clearing participant may use more than 50 per cent of this component at any time.

Participants can register sub-block trading venue trades without this credit check. Sub-block trading venue trades are trades below a certain size which are transacted on an electronic trading facility.[31] Participants can register these trades even if they do not have sufficient collateral held by LCH Ltd or RTTR component tolerance available. However, participants will need to meet any incremental initial margin requirement for sub-block trading venue trades at the next intraday margin call.

Unfunded loss allocation rules

In extreme cases it is possible that prefunded financial resources could be insufficient to fully absorb default-related losses, leaving the CCP with an uncovered credit loss shortfall. In such an event, LCH Ltd would allocate remaining losses to surviving clearing participants through ‘loss allocation rules’:

  • Unfunded contributions. For each default, LCH Ltd is able to call unfunded contributions from non-defaulting participants up to the value of their last default fund contribution per default, subject to a maximum of three defaults in any six-month period.
  • Loss distribution process. LCH Ltd may apply pro-rata haircuts, up to a cap, to the variation margin payments owed to non-defaulting SwapClear participants whose positions make gains. This process is known as variation margin gains haircutting (VMGH).
  • Voluntary service continuity contributions. Should losses remain following the loss distribution process, LCH Ltd would invite non-defaulting participants to make voluntary contributions to avoid the service closing.
  • Service closure. If insufficient voluntary payments were made to cover the remaining credit losses, the Rates service DMG would make an Insufficient Resources Determination and LCH Ltd would close the SwapClear and Listed Rates services. In the event the SwapClear and Listed Rates services were wound down, all outstanding SwapClear and Listed Rates contracts would be terminated and the DMG would calculate a sum owing between LCH Ltd and each non-defaulting clearing participant.

B.2 Governance

B.2.1 Structure of LCH Group

LCH Ltd is a wholly owned subsidiary of LCH Group (Figure 2). As at 30 September 2020, LCH Group is 82.6 per cent owned by the London Stock Exchange (C) Limited, a wholly owned subsidiary of LSEG, and 17.4 per cent owned by others, including clearing participants.

LCH Group is a holding company incorporated in the UK. In addition to LCH Ltd, LCH Group has another majority owned subsidiary that actively operates central clearing services, LCH SA. A third subsidiary, SwapAgent service, offers processing, margining and settlement services for non-cleared derivatives.

Figure 2
Figure 2: LCH Group Structure

B.2.2 LCH Group and LCH Ltd governance arrangements

LCH Group and LCH Ltd (as well as the other LCH Group CCPs) have independent governance structures, including their own boards, board-level committees and executive-level committees (Figure 3).

Figure 3
Figure 3: LCH Group Board and Committee Structure

Although LCH Ltd, LCH Group and the other LCH Group entities each operate under separate governance arrangements, there is close coordination between each entity. To promote consistency and to avoid duplication, a number of the CCP and LCH Group board-level and executive-level committees have overlapping memberships, with some routinely sitting together. Many of the key policies that govern LCH Ltd's operations are Group policies, developed by LCH Group and the LCH Group CCPs in coordination, and apply across each of the CCPs. LCH Group Risk policies must be approved by the LCH Ltd Board to be applicable to LCH Ltd, after review by the board-level Risk Committee.[32]

LCH Ltd also coordinates closely with LCH Group and the other LCH Group CCPs in day-to-day processes; some processes, such as the assignment of ICSs and model validations, are performed at the LCH Group level, rather than the individual CCP level.

LCH Group and LCH Ltd Boards

The LCH Group Board is responsible for the overall management and strategic direction of the LCH Group. The Group board is an internal-only board with 5 members who are executives from LSEG and LCH Group. As at 30 September 2020, the LCH Group Board meets at least three times a year and on an ad hoc basis, as required.

The LCH Ltd Board has ultimate responsibility for LCH Ltd. This includes responsibility for: establishing clear objectives and strategies; establishing and overseeing the risk management function; ensuring compliance with legal, regulatory and contractual responsibilities; overseeing the compliance and internal control functions; and monitoring LCH Ltd senior management. Where there is overlap in the matters reserved for the LCH Group and LCH Ltd Boards, the relevant matter will require the approval of both boards. The LCH Ltd Board has 12 directors, including 5 independent directors (including the Chair), the CEOs of both LCH Group and LCH Ltd, the LCH Group Chief Risk Officer (CRO), 3 member representatives and 1 director nominated by LSEG.

Board-level and executive-level committees

LCH Ltd and LCH SA have similar board-level and executive-level committee structures. The committees have overlapping, but not identical memberships. The board-level Risk Committees routinely sit together facilitating cooperation and coordination, and reducing repetition. The CCP board-level Audit and Remuneration Committees may also sit together. Issues specific to a particular CCP can be considered at combined meetings.

Key LCH Ltd board-level and executive-level committees include:

  • LCH Ltd Risk Committee. The LCH Ltd Risk Committee is a board-level committee with key responsibilities including providing independent advice to the LCH Ltd Board on risk policy, new markets and products, and amendments to margin and stress testing methodologies. The Risk Committee considers and comments on all aspects of LCH Ltd's risk appetite, tolerance and strategy, and assists the LCH Ltd Board to fulfil its responsibility for the oversight of risk management of LCH Ltd.
  • LCH Ltd Technology, Security and Resilience Committee. The board-level LCH Ltd Technology, Security and Resilience Committee assesses the adequacy of LCH Ltd's strategies and plans for the management of technology, security, operational and cyber risks. It also assists the LCH Ltd Board in reviewing the frameworks, policies and strategies that set the internal control environment in relation to LCH Ltd's technology, operational resilience, security and regulatory compliance
  • LCH Ltd Management Team and LCH Ltd Operating Committee. LCH Ltd Management Team is responsible for strategic planning and objective setting for LCH Ltd. The Operating Committee is responsible for overseeing the day-to-day running of the CCP and acting as an advisory to the Management Team. Permanent members of the teams include senior management from both LCH Ltd and LCH Group. These teams replace LCH Ltd's former LMC. LCH SA and SwapAgent have retained their LMCs.
  • Executive Risk Committees (ERCos). LCH Ltd, LCH SA and SwapAgent each have an ERCo. The ERCos have overlapping membership, meet concurrently and are chaired by the Group CRO. Each ERCo is responsible for the management, monitoring and oversight of all material risks faced by the relevant entity. The LCH Ltd ERCo reports directly to the LCH Ltd Risk Committee and, via the LCH Ltd CRO, provides regular updates on its activities to the LCH Ltd Management Team.
  • Other key committees and working groups. Various committees support decision-making within LCH Ltd. These include (among others): the Group-level Risk Resilience Committee and, at a CCP level, the Change Management Committee and Rule Change Committee. In addition, the LCH Group Financial Risk Working Group typically considers matters related to financial risk at LCH Ltd before they are submitted to the LCH Ltd ERCo for review or approval.

Senior management

LCH Group and LCH Ltd have similar senior management structures and reporting lines (Figure 4). Some positions across LCH Ltd and LCH Group are held by the same person (‘double hat roles’).

Figure 4
Figure 4: Senior Management Positions and Reporting Lines

B.2.3 Departments in LCH Ltd

LCH Ltd is organised into departments based on its core functions and the products it offers. The ‘functional’ departments include: Audit, Collateral and Liquidity Management (CaLM), Compliance, Finance, Human Resources, Information Technology, Legal, Operations and Risk. Departments are further divided into teams. For example the Risk department includes teams responsible for credit risk, default management, risk resilience, reporting, collateral and liquidity risk. It also includes several product-specific Risk teams which operate as a second line of defence to the first-line Risk functions operated by each business. The CaLM department is responsible for ensuring investment activities are conducted in accordance with the relevant Group Risk policies and regulations and is separate to the Collateral and Liquidity Risk Management (CaLRM) function, which is responsible for monitoring and assessing various risks against Group Risk policies. ‘Product’ departments are structured around LCH Ltd's various clearing services and include the SwapClear business unit.

B.2.4 Governance of SwapClear

The Head of SwapClear and Listed Rates is responsible for developing and managing the SwapClear and Listed Rates services, and has the authority to develop and implement business strategy, operational plans, policies and budgets for SwapClear and Listed Rates. The Head of SwapClear and Listed Rates reports directly to the CEO of LCH Ltd. LCH Ltd also maintains regional representation for SwapClear in Australia. The Asia-Pacific Head for LCH Ltd, who reports directly to the LCH Ltd CEO, is responsible for overseeing the strategy and business operations of SwapClear and other services in Australia and the Asia-Pacific region.

SwapClear operates as a distinct business unit within LCH Ltd, although it is not a separate legal entity. SwapClear has its own executive management team overseeing its operations and has a dedicated team that performs risk management functions consistent with policies set at the LCH Ltd and LCH Group levels. The Rates service (encompassing SwapClear and Listed Rates) risk management team's responsibilities include determining stress test scenarios and sizing the Rates default fund, pricing positions and calling variation margin, calling additional margin, determining and performing backtesting for initial margin, and determining SwapClear default management protocols. The second line of defence comprises both LCH Group and LCH Ltd level functions. Responsibilities at the Group level included the maintenance of risk policies aligned to the LCH Ltd Board's risk appetite, determination and monitoring of ICSs and credit risk related limits, new product approvals and the risk governance process. Teams in LCH Ltd are responsible for analysis of margin and default fund adequacy and methodologies, risk aggregation and reporting, new product reviews and default management coordination for each clearing service.

B.3 Regulatory Environment

As described in section 2.2, LCH Ltd is incorporated in England and licensed in Australia under section 824B(2) of the Corporations Act 2001. LCH Ltd is primarily regulated by the BoE under UK and EU legislation.

The Bank has a memorandum of understanding in place with the BoE regarding supervision of CS facilities.[33] The memorandum provides a framework for bilateral cooperation, including information sharing and investigative assistance. The Bank also engages with the BoE on LCH Ltd supervision matters through the LCH Ltd Global College, which was established in 2012 (see below).

B.3.1 The regulatory regime

LCH Ltd's operations are subject to a number of regulatory regimes:

  • UK regulation. Within the UK, LCH Ltd is regulated by the BoE as a ‘recognised central counterparty’ under the UK Financial Services and Markets Act 2000. This sets recognition requirements for UK CCPs including EU EMIR compliance, maintaining a recovery plan and loss allocation rules, and instituting measures to monitor and reduce potential market abuse. The PPS operated by LCH Ltd is regulated and overseen by the BoE as a ‘recognised payment system’ under the UK Banking Act 2009.
  • EU regulation. In the EU, LCH Ltd is authorised under EMIR, a harmonised framework for the regulation of FMIs, including CCPs, incorporated in the region. During the Brexit transition period, this law will continue to apply to LCH Ltd. After this time, LCH Ltd will become a foreign or ‘third country’ CCP under EMIR.
  • Regulation in other jurisdictions. LCH Ltd's operations span several jurisdictions. Outside the European Economic Area and Australia, LCH Ltd has been formally licensed or granted an exemption in the US, Switzerland, Japan, the Canadian provinces of Ontario and Québec, Mexico, Hong Kong and Singapore, allowing it to offer a range of clearing services in those jurisdictions.

B.3.2 The EMIR College and the Global College

EMIR provides a framework for cooperative oversight of CCPs among EU authorities, requiring that a supervisory college be established for each EU-based CCP.

The EMIR supervisory college for LCH Ltd (EMIR College) is chaired by the BoE and plays a role in the ongoing supervision of LCH Ltd, including when LCH Ltd applies to the BoE to expand its services or make significant changes to its risk models. The EMIR College also facilitates the exchange of information among its members.

The BoE has also established a Global College for LCH Ltd, membership of which extends beyond the EMIR College. The Bank is represented on the Global College.

B.3.3 The Bank of England's oversight approach and supervisory priorities

The BoE has a mandate to protect and enhance the stability of the UK financial system. In its role as supervisor, the BoE aims to ensure FMIs are ‘managed in a manner that is consistent with the public interest including reducing systemic risk’.[34] The BoE takes a risk-based approach to oversight, prioritising its supervisory efforts in areas where it considers risks to financial stability are greatest.

The BoE conducts at least annual assessments of the risks each UK FMI presents to financial stability. Based on its assessment, the BoE sets expectations of risk-mitigating actions the FMI should take, in the form of supervisory priorities. The BoE provides LCH Ltd with a single set of supervisory priorities, covering its operations as a CCP and as a payments system. The BoE also conducts thematic reviews across all CCPs for which it has oversight responsibility.

In light of the ongoing COVID-19 pandemic, the BoE has scaled back its supervisory activities, where appropriate, to focus on the operational and financial resilience of CCPs, including their ability to operate under business continuity arrangements for an extended period. A number of non-critical reviews and business-as-usual supervisory activities have been postponed.

B.3.4 Resolution

As a UK-based CCP, any resolution of LCH Ltd would be governed by UK law. Under the UK's legal framework, resolution of CCPs is governed by the UK Banking Act 2009 (which was extended to include CCPs by the UK Financial Services Act 2012). In August 2014, secondary legislation was introduced to enter the resolution regime into force for CCPs.[35] The BoE is the resolution authority for UK CCPs.

The BoE leads the LCH Ltd Crisis Management Group (CMG), of which the Bank is a member. The role of the CMG is to discuss and facilitate development of a resolution plan for LCH Ltd.

B.4 Operational Risk Management

Operational risk is the risk that deficiencies in information systems, internal processes and personnel, or disruptions from external events, will result in the reduction, deterioration or breakdown of services provided by a CCP. Operational failures can damage a CCP's reputation or perceived reliability, have legal consequences, and result in financial losses incurred by the central counterparty, participants and other parties. In certain cases, operational failures can also be a source of systemic risk.

LCH Ltd uses a ‘three lines of defence’ approach to assign responsibilities for identifying, monitoring and managing operational risks:

  • The first line of defence is embedded within business lines and support functions, including the Business, First Line Risk, Operations and IT departments. These areas are responsible for the day-to-day management of operational risks within risk appetite, including maintaining effective internal controls and ensuring that all material risks are identified.
  • The second line of defence is provided by LCH Ltd Risk Resilience department and the LCH Group Risk Resilience Committee and is responsible for maintaining and supporting the development of policies consistent with the Operational Risk Management Framework. It provides oversight, support and challenge to the first line of defence in relation to risk management activity and adherence to the Framework. The second line also produces aggregated risk reporting to senior executive committees and the LCH Ltd Board.
  • The third line of defence is internal audit, encompassing the LCH Ltd Internal Audit department and the LCH Ltd Audit Committee, who are responsible for reviewing the effectiveness of the management and governance of operational risk, including the system of internal controls and the operational risk framework, and providing assurance to the Board.

LCH Ltd classifies different aspects of operational risk into distinct ‘resilience’ risks and maintains policies, procedures and controls to address each of these risks:

Technology risk is the risk technological failures disrupt critical services provided by LCH Ltd. As the primary objective of IT systems is to support LCH Ltd's services, IT systems are managed to minimise the potential for the disruption of service. This includes maintaining sufficient capacity for service growth, service availability targets and technology change management processes to ensure critical systems maintain a high level of performance.

Business continuity risk refers to potential losses arising from a failure to recover from the disruption of critical business or IT processes due to adverse circumstances or events. The LCH Ltd Board expects that adequate processes are in place to minimise disruption. These processes include service availability targets, the regular testing of back-up and recovery plans to recover critical systems within two hours of a disruptive event, and the operation of geographically distinct secondary processing sites capable of running all critical functions.

Information and cyber security risk refers to the risk to LCH Ltd's operations, assets, staff and partners arising from unauthorised access, use, disclosure, disruption, modification, or destruction of information and/or information systems. To manage these risks, LCH Ltd expects that appropriate checks are performed prior to information leaving LCH Ltd in the normal course of business and cyber security threats are appropriately evaluated and key controls remain adequate. This is complemented by employing the National Institute of Standards and Technology (NIST) cyber security framework and the CPMI-IOSCO Guidance on Cyber Resilience.

Default management risk covers the risk that adequate processes are not in place prior to a default event, which leads to a material deterioration in the market value of assets held by LCH Ltd. To minimise this risk, LCH Ltd has policies and procedures in place that set out the key roles and responsibilities in managing a participant default. LCH Ltd conducts Group-wide and partial fire drills at least annually to test both participants' and the CCP's awareness of and ability to implement the default management process.

Operational risk, as defined within the LCH Group Risk Governance Framework, refers to all other risks where loss may arise from inadequate or failed internal processes, people and systems, or from external events. The LCH Ltd Board has a low appetite for operational risks and requires these risks to be managed in a proactive manner to minimise the impact to LCH Ltd.

When any resilience risk is assessed to be outside or near LCH Ltd's risk appetite, a mitigation plan must be developed and implemented to bring the risk within the specified risk appetite. Any outside appetite risks that will take longer than six months to return within LCH Ltd's risk appetite must be notified to the LCH Ltd Board. The LCH Ltd Board is responsible for determining the LCH Ltd appetite for operational risk.


Pre-funded resources can be in the form of initial margin or the real time registration component (Appendix B.1.3). [25]

The additional two-day holding period for client positions allows time for clients to decide whether to seek to port their portfolio to another clearing participant, as well as time to carry out any such transfer. [26]

A clearing participant that defaulted would be deemed to have defaulted in all LCH Ltd services. If any of that clearing participant's margin and default fund contributions for a given service were not required to meet losses in that service, they would be applied to losses in any other service of which that clearing participant was a member. [27]

Losses in one LCH Ltd service cannot be applied to the mutualised resources of the default waterfall of another LCH Ltd service (apart from within the Rates service). In an extreme situation, a given LCH Ltd service could be closed, while the other services remained open (apart from the services within the Rates service). [28]

The STLOIM of a participant and its affiliates is based on the stress test losses and initial margin of the participant, its affiliates, and all the clients of the participant and its affiliates. [29]

Portability refers to the ease with which LCH Ltd is able to transfer a client's positions and associated collateral from one direct participant to another. Portability is assessed with reference to the number of live backup clearing arrangements of each client account. [30]

For further information, see Sub-Block Trading Venue Transaction – SwapClear and ForexClear. Available at <>. [31]

The LCH Group Risk policies are: the Financial Resource Adequacy Policy; Liquidity Risk Policy; Operational Risk Policy; Investment Risk Policy; Collateral Risk Policy; Counterparty Credit Risk Policy; Contract and Market Acceptability Policy; Default Management Policy; Settlement, Payment and Custody Risk Policy; Model Governance, Validation and Review Policy; Procyclicality Policy; Information Security and Cyber Risk Policy; Technology Risk Policy and the Business Continuity Risk Policy. [32]

The memorandum is available at <>. [33]

BoE (2013), The Bank of England's approach to the supervision of financial market infrastructures. Available at <>. [34]

For more information on the circumstances under which resolution tools would be used, see <>. [35]