Risk Management - SA

The Clearing House needs to provide robust and prudent risk management in order to meet its overriding objective: to provide Clearing Members with a central counterparty of the highest quality and to safeguard the interests of the company's shareholders and contributors to its Default Funds.

For SA specific information select from the links on this page.

For Group risk management information, including an overview of LCH risk mitigation approach, default waterfall structure and history of default management, select the Group tab.

Risk governance and framework

Risk governance

Matters concerning significant risks faced by the Group's CCPs are addressed by a Risk Committee appointed by the relevant subsidiary Board.

Chaired by an Independent Non-Executive Director (INED), membership of the Risk Committee is comprised of representatives of the CCP's users and their clients, and other INEDs. Further representatives from each CCP's user community and senior CCP executives attend the meetings as risk experts in a non-voting capacity.

Where appropriate, The Risk Committee Chair and the Board are advised by the Chair of the Board Operational Resilience Committee (ORC). Chaired by an Independent Non-Executive Director, the ORC is tasked with ensuring that technology, security and operational resilience strategies, investments and outcomes support LCH’s mission, values, and strategic goals.

Internally, an Executive Risk Committee (ERCo) reports to the LCH SA Board Risk Committee and the Local Management Committee (LMC). Chaired by the Chief Risk Officer (CRO), membership of the ERCo comprises heads of each clearing business as well as senior risk management and compliance executives.

Sub-Committees and Working Groups consider all risk matters prior to presentation to the ERCo.

Risk Committee and ORC Terms of Reference and current membership are available to view here.

A chart of the Risk Governance Committee structure is available to view here.


Risk classification

The LCH Risk Governance Framework identifies and establishes the Board's appetite/tolerance for the following risk classifications under the remit of the Risk Management department.

Financial & Model Risks

Operational Resilience Risks

Strategic Risks

People & Culture Risks  Legal, Regulatory & Compliance Risks

Default Management Risk

Technology Risk

Business Risk

Risk Culture Legal Risk

Latent Market Risk

Business Continuity Management Risk

Transformation Risk

People & Talent  Regulatory & Compliance Risk

Procyclicality Risk

Information Security & Cyber Risk

Reputational Risk

  Conduct Risk

Credit Risk

Physical Security Risk

Sustainability (ESG) Risk

  Oversight & Governance Risks

Investment & Liquidity Risks

Third Party Risk

Geopolitical Risk

  Financial Crime

Settlement, Payment & Custody Risks

Data Risk

Tax Strategy

  Fraud Risk

Model Risk

Operational Process Risk


  Financial Reporting & Tax

Capital Risk




Pension Risk




Insurance Risk




Management of the Financial & Model and Operational Resilience risks identified above is effected through a set of risk policies maintained by the Risk Management department. All other risks are managed by specific business functions.

Each risk policy defines how the high level principles and standards contained in the Risk Governance Framework and relevant regulation are applied, and is supported by detailed annexes and procedural documentation which demonstrate how policy requirements are met.

All risk policies are subject to at least annual review by internal risk management committees and the Board Risk Committee, and require Board approval.

Margining methodology

Initial margin for all services is calibrated to be sufficient to offset any losses under normal market conditions incurred during the close-out period of a Clearing Member default, to a 99.7% confidence level. The percentage applied is agreed by the LCH Board and set out in the LCH Risk Governance Framework which is shared with the competent authorities.

Additional margins are levied to cover position concentrations, wrong way risk, illiquid positions and Clearing Members with lower credit standing or capital support.

Margins are back-tested daily for each Clearing Member and sub account against this confidence level, and reported monthly at clearing service level to regulators and at least quarterly to the Risk Committee. Service level margin back-testing results are included in the quarterly quantitative disclosures available in the Resources section of this website.

Please refer to the following section on margin models and their governance for further information.


Margin models & governance

Model inventory

An up-to-date inventory of all models is maintained. All models are reviewed by an independent model validation team annually. Material changes and all new models are also subject to an independent validation.

The inventory and validation status are reviewed annually by the Board.

Model performance is assessed daily through portfolio back-testing.

The margin models applied to each service are identified in the section below.


Margin models


Model type

Margin method used

Minimum look-back period

Holding period

Frequency of parameter review



VAR / Expected Shortfall

Since April 2007

5 days


RepoClear SA


VAR (Sovereigns) 

SPAN®-like (€GCPlus other bonds)

10 years

5 days (Sovereigns)

7 days (€GCPlus other bonds)


Cash Securities


VAR / Expected Shortfall

10 years

3 days




SPAN® derivatives for Options and Futures

1 year

2 days



Default funds and stress testing

Mutualised Default Funds are calibrated monthly and tested daily to be sufficient to withstand the default of the two Clearing Members giving rise to the largest losses calculated under scenarios of extreme conditions. Default Funds have a floor and a cap to ensure minimum levels of protection and avoid over-mutualisation.

Clearing Member contributions are subject to a minimum amount and re-calibrated monthly in proportion to the risk they introduce.

A proportion of CCP capital is placed ahead of non-defaulting Clearing Member contributions in the waterfall.

The default waterfall structure can be viewed here.

Clearing Members with large stress losses over margin are charged additional margins where the cap would otherwise be exceeded and intra-month if credit related tolerances are reached.

Analysis of stress testing and Default Fund adequacy is reviewed by the Risk Committee at least quarterly.

Stress test data linked here is designed to answer two key questions:

  1. How safe are my margins, and by extension, my default fund contribution?
  2. What is the maximum assessment that I could be asked to provide, and in what circumstances?


Collateral risk

Cash and securities eligible to cover margin liabilities are restricted to those with low credit, liquidity, and market risks. Default Fund contributions can only be made in cash in the primary currencies designated by each clearing service, or, for certain markets, Central Bank guarantees.

Haircuts are applied to securities to cover market, credit, concentration/liquidity, wrong way and foreign exchange risks, calculated to a 99.7% confidence level over a 3 day horizon based on a 10 year look-back period.

The types of collateral currently acceptable, their haircuts and other conditions can be viewed by selecting the following link:

LCH SA Collateral

LCH SA has a right of use of margin or Default Fund contributions collected within the meaning of Article 2(1)(c) of Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements, and therefore provides for such right in its operating rules.

LCH SA Rulebook

Default management

LCH CCPs have detailed default management plans and procedures consistent with the Default Management Policy.

These provide clear criteria for when to call a Clearing Member into default and the steps to be followed in order to manage such a default event.

The policy also requires frequent default management testing or ‘fire drills', at both product and cross product levels.

The CCP Rulebooks outline the relationship between LCH and Clearing Members, covering the rights and obligations of each during a Clearing Member default.

Use the following link to view the: LCH SA Rulebook

Credit risk and membership

LCH Group CCPs review the counterparty risk of Clearing Members and other counterparties including sovereigns by continually monitoring market indicators and financial information.

An Internal Credit Scoring (ICS) framework assesses the entity’s:

Financial Profile, including:

  • Asset quality
  • Capital adequacy
  • Funding & liquidity; and
  • Profitability


Operational Capability, including:

  • External support (if applicable)
  • Operating environment
  • Operational profile; and
  • Risk management policies & procedures
  • Support and sovereign ceiling considerations


The rating model is validated at least annually and the rating scale is continuously monitored for performance.

A minimum credit score is set for joining a clearing service and the same entry requirement is applied to existing Clearing Members wishing to join another service within LCH. Increased margins are applied when the credit score deteriorates below the entry level. Other actions may include reduced credit tolerances and forced reduction of exposures.

More detailed information on membership, including entry criteria, the application process and current membership, for each of the Group CCPs can be viewed here.

Membership and client risk disclosure

The key risk connected with being a Clearing Member (or client of a Clearing Member) of any LCH clearing service will be a risk of financial loss. Some of the associated risk scenarios are described below:

  • Clearing Member default –non-defaulting Clearing Members are at risk of losing Default Fund contributions and further Default Fund assessments. Each service also has a process to allocate further losses to Clearing Members of that service. In the event of service closure, replacement costs could be incurred. Clients of a defaulting Clearing Member may also incur losses or disruption to their activities as a result of the default management process. For further information please refer to the following rules in respect of the:


Cash/Derivatives/ Fixed Income/ Triparty Repo segments:

  • LCH SA Clearing Rule Book : Title IV – Chapters 3 and 5 and Section 5.3.2
  • Instruction IV.5-2 (all segments)
  • Instructions IV.3-1 and IV.5-5 (Cash and Derivatives) 
  • Instructions IV.3-2 and IV.5-3 and IV.55-4 a, (Fixed Income)
  • Instructions IV.5-4 a, V.4-2 and V.4-3 (Triparty Repo)


CDSClear segment:

  • LCH SA CDS Clearing Rule Book: Section 3.1.9 and Title IV, Chapters 3 and 4
  • CDS Default Management Process attached as Appendix 1 to the LCH SA CDS Clearing Rule Book.


Default (insolvency) of LCH – For information on the applicable rules please refer to:

  • Cash/Derivatives/Fixed Income/ Triparty Repo segments:
  • LCH SA Clearing Rule Book: Title I – Chapter 4
  • CDS Clearing segment:
  • LCH SA CDS Clearing Rule Book: Title I – Chapter 3


In the event of market disorder, impossibility of performance, trade emergency or in cases of force majeure, the LCH SA Cash /Derivatives /Fixed Income /Triparty Repo Clearing Rule Book and the LCH SA CDS Clearing Rule Book (Section 1.2.11), as the case may be, may apply and Clearing Members could suffer losses as a result of actions taken by LCH.

Disclaimer: The above description is a summary of the key financial risks to which Clearing Members of LCH and/or their clients may be exposed. This list is not exhaustive and Clearing Members and their clients should review the applicable clearing rules, as amended from time to time, and carry out their own risk analysis.

LCH SA clearing rules

Investment Risk

Investment risk arises through the investment of Clearing Member cash posted as collateral for margin liabilities and Default Fund contributions. Investments are made in such a way as to ensure that principal is protected and liquidity is available when needed, even under stressed conditions.

To deal with this:

  • All investment counterparties meet minimum credit standards according to an internal credit assessment
  • All investments meet minimum credit criteria, and must be explicitly Government guaranteed
  • The average term of the investment portfolio is consistent with regulatory standards
  • Unsecured investments are limited to <5% of total lending to commercial banks and must be no longer than overnight in term