FX Haircuts on Collateral - July Update
LCH Circular No 3964
19th July 2018
All LCH Clearing Members
Dear LCH Member,
Further to our previous circular covering FX Haircuts on Collateral (Circular No. 3947 - 19th April 2018), we would like to notify you of the detailed changes to the collateral reporting, impacts to providing collateral through tri-party and further details on the timeline of the program.
Collateral Report changes:
As outlined in the previous circular the application of FX Haircuts impacts existing collateral reports and will see the introduction of new collateral reports. These are as follows.
Existing reports being changed/decommissioned:
- REP00019 - Overnight Cover Distribution; and
- REP00030 - Cover Calling Summary.
- REP00031 - Collateral and Exposure Summary;
- REP00046a - SOD Cash Collateral Holdings; and
- REP00046 - Cash Collateral Holdings.
In order to provide flexibility to members, for scheduling of changes on their side, LCH will be introducing the new reports first on the 3rd September 2018 in parallel to the unchanged existing reports. Existing reports will then be changed/decommissioned at the end of October.
Please see the attached for full details including timing, report specifications and examples. LCH will circulate further sample files for the new reports and make these available in Member Test by mid-August.
Member Tri-party changes (Euroclear):
In addition to the report changes outlined above, Clearing Members who utilise tri-party at Euroclear to cover their margin liabilities will need to align their triparty instructions to new eligibility sets. This enables LCH to apply different FX Haircuts to each triparty transaction based on the cleared positions’ currency of risk and remove the current 5.25% FX floor at Euroclear, this enables members to reap full benefit of the new methodology.
As of 3rd July, LCH implemented this new structure for all new triparty members and will now begin a process to migrate existing transactions. LCH will provide a new unique eligibility set per collateral account, members will need to match this via Euroclear’s Fast-track activation process. Members must then quote their unique eligibility set in future triparty instructions. In order to migrate to the new eligibility sets members will be required to close existing Triparty transactions and open new transactions. Members will be able to have both current and new transactions open in parallel and be able to control the precise timing of the change from their end.
LCH’s Collateral Operations team will contact members individually over the coming months to discuss these migration activities, which will take place during September.
Member Tri-party changes (Clearstream):
Clearing Members who utilise tri-party at Clearstream to cover their margin liabilities will not need to align their triparty instructions or make any changes to triparty collateral processing as LCH can already apply different haircuts to each Clearing Member.
Clearing Members who utilise Clearstream triparty will be required to have a single currency of risk defined across all their collateral accounts. Where a Clearing Member is using Clearstream triparty to cover two separate accounts, for example one transaction to collateralise RepoClear and a second to collateralise SwapClear activity, both accounts will share the same currency of risk (based on the cleared positions across both accounts). When lodging triparty collateral to a new account (i.e. extending to say ForexClear activity) then LCH will only permit this where the account shares the same currency of risk profile. Accounts for the same member that do not utilise Clearstream triparty will not face this restriction.
LCH’s Collateral Operations team will contact impacted members individually during September to discuss the impacts of this in more detail.
As outlined in the reporting pack attached to this circular, the intended go-live for the changes to the collateral valuation (including the removal of the current 5.25% FX floor) is 29th October 2018 (subject to regulatory review and approval). In advance of this, there will be further communications with respect to advising members of their dominant currency of risk per collateral account and details of Clearing Service specific changes, which collectively form the other deliverables for this program as outlined in the previous circular.
In addition, these changes are being discussed with Clearing Members as part of LCH Product Advisory Groups, Risk Working Groups and in the usual change forums.
Further information on the reporting impacts listed above, is provided in the attached pdf.
If you have any questions please contact us at firstname.lastname@example.org