Clearing the Deck: LCH.Clearnet Adds Intra-day Margin Call on Futures and Options
by Frances Maguire
LCH.Clearnet Ltd. is preparing to introduce a new margining system in the first quarter of 2004 that will enable the clearinghouse to make routine intra-day margin calls for all exchange–traded futures and options.
The new system, called Idris, is already in operation for swaps, repos and equities, and officials for the U.K. clearinghouse say extending it to futures and options will improve risk management without requiring major changes to member firm clearing systems. LCH.Clearnet SA, the Paris-based subsidiary of the group, has no plans at present to apply Idris.
The project has been in development for several months, and in mid-December the clearinghouse sent each clearing member a guide to the new system and examples of how an intra-day margin call would affect that firm, based on data the clearinghouse had collected over the past two months. A member consultation process will take place in early 2004.
Currently the clearinghouse performs its margin calculations at the end of the trading day for futures and options. Under the new system, it will run an additional set of calculations at 1:00 p.m. each day and make margin calls on the clearing firms based on their positions at that point in time.
Andrew White, director of risk policy at LCH.Clearnet Ltd., says: “Idris will take a snapshot of all positions and prices at all the underlying clearing systems at the exchanges and recalculate profit and loss and initial margins using Span.”
To help clearing firms anticipate the intra-day margin call, the clearinghouse plans to send out a first batch of indicative margin data at 12:00. This will give the firms a chance to adjust their positions and check their funding ahead of the actual call.
The flow of funds will be one way only, however. The clearinghouse will not pay out any margin until the beginning of the next trading day, in keeping with current practice. On the other hand, any intra-day profits will be netted against any increases in initial margin, thus reducing the size of the potential intra-day call.
The clearinghouse believes that the routine intra-day margin call will encourage timely allocation of customer trades among clearing firms, in line with exchange best practices. Once Idris takes effect, the executing brokers will have an incentive to allocate those trades to the clearing firms as quickly as possible, rather than waiting until the end of the day, in order to minimize the intra-day call.
The two largest suppliers of back office systems, SunGard and Rolfe & Nolan, were in discussions with the clearinghouse in December about how the extra daily margin call would impact their systems. A spokesperson for one vendor said that while it was able to operate real-time margining already, it was seeking to ensure the timely receipt of data files from the clearinghouse for the intra-day margin call in order to retrieve and post files to users of its back office system.
An important benefit of intra-day margining is that new positions will be registered during the day, rather than an hour after the markets close.
Another benefit to member firms is that Idris will enable intra-day offset of margins, White says. “Currently, intra-day margining done outside of Idris is relatively conservative and done on a contract-by-contract basis with no offsets. Idris uses a real-time portfolio calculation that will aggregate profit and loss across a member’s entire portfolio.”
Judging by early indications from the member firms represented on the clearinghouse’s risk committee and its board of directors, firms are unlikely to pass on the intra-day margin call to customers, according to White. The main impact of intra-day margining therefore will be on the treasury and cash management operations of the clearing firms, which will now have to fund two routine daily payments to the clearinghouse.
White also adds that the introduction of intra-day margining means the default fund is less likely to be called upon. “Routine intra-day margining will provide an extra layer of protection for the clearinghouse and its members ahead of initial margining and the default fund—meaning the mutualized pool will be an extra step away from being at risk.”
Alex Wilkinson, head of listed products at Dresdner Kleinwort Wasserstein in London, says that the move will simply mean a second cash margin call for member firms. “This will close the window on matched exchange-trades that is currently not closed until the end of the trading day, and will enable intra-day novation to quantify the level of risk more precisely, at the clearinghouse level,” he says.
Frances Maguire is a freelance financial journalist based in London.
