Customer Protection

SwapClear offers some of the market’s most sophisticated customer protection tools, ranging from various forms of position segregation to full collateral segregation.

The Details

Our unmatched safety and stability is an achievement of which we are proud. For all US customers, SwapClear provides the strongest form of LSOC possible.  If you are clearing in Europe, SwapClear empowers you to determine the level of protection that’s right for you and for your cleared portfolio.

Below you can find some of the position and customer segregation tools at your disposal.

Customer Protection under EMIR

*available through our SCM service

At SwapClear we believe that every challenge is an opportunity. This belief underpins all our work in customer protection. Mandatory central clearing of derivatives under EMIR brought with it new requirements for CCPs with respect to the type and level of protection afforded to customers.  Now, under EMIR, your options for protecting your cleared positions and collateral are more expansive than ever before.

SwapClear offers our EMIR clients five distinct segregation options with each presenting varying degrees of position and collateral segregation for your portfolio. Whether you want to target the level of protection desired for your positions, collateral, or both, and balanced with maximizing cost efficiencies, SwapClear can assist you in selecting the segregation option that is fit to your purpose.  Seeking to minimise initial margin and keep costs down? Choose Value Omni which takes advantage of operational efficiencies across the client account, while still ensuring your positions are segregated from your clearing member.

Unsure of the segregation model that’s best for you? Use our decision tree below to explore your protection options.

Omnibus or Individual Treatment?

SwapClear's protection plans differ in their EMIR classification. Our omnibus ("Omni") plans pool your positions with those of other customers, which means some mutualization of risk—in a default, you may share another client's losses.

However, pooling allows SwapClear to net offsetting positions, which can reduce your initial margin requirements considerably. And Omni plans let you choose the other clients in your pool—you could limit this to your own affiliates, for example.

Our individual segregation ("Seg") plans completely separate your actual positions and/or collateral assets from those of other clients, eliminating fellow-customer risk. Since these plans do not allow for position netting, you do not benefit from a reduction of initial margin.

Do you want your swap positions segregated from those of other counterparties?

Asset or Value Protection?

SwapClear's protection plans fall into two categories: "asset" and "value". Under our asset-based plans, we keep a record of exactly which of the securities posted as collateral are yours. This enables SwapClear to preserve, and then port or return these assets in the event that your clearing member defaults.

Under our value-based options, SwapClear tracks and safeguards a value of client assets for porting or return after a default.

Do you want to protect your actual assets?

Value or Asset Protection?

SwapClear's protection plans fall into two categories: "asset" and "value". Under our value-based options, SwapClear tracks and safeguards the value of the assets in your clearing member's client account in the event of a default.

Under our asset-based plans, we record the specified securities posted as collateral directly into your account. This enables SwapClear to preserve, and then port or return these specified assets after a default.

Do you want to protect your actual assets?
Asset SEG Value SEG Asset Omni Value Omni Custodial SEG

The AssetSeg account segregates your positions and collateral assets from those of all other clients. In a clearing broker default, SwapClear treats your collateral value collectively, drawing on the value attributed to the account to meet all position losses. Importantly, we identify, and can therefore potentially preserve, your specified assets, which port individually to the clearing broker of your choice.

The ValueSeg account segregates your positions from those of all other clients. Your positions port individually to the clearing broker of your choice, along with the collateral value associated with your account.

The AssetOmni account commingles your positions in a pool with those of other clients that you select. This mitigates fellow customer risk while giving you a controlled netting benefit. SwapClear can identify and potentially preserve the specified assets recorded into the pooled account. In a clearing broker default, SwapClear can draw on these assets only to meet the pooled account's losses, not those of any other clients. All positions port together to another clearing broker, but you can select which.

The ValueOmni account commingles your positions with those of other clients, exposing you to some fellow customer risk; however, you can select the other participants within the pool. This gives you a controlled netting benefit. In a clearing broker default, SwapClear treats your collateral value collectively, drawing on the value attributed to the account to meet all position losses. Pooled positions port together to another clearing broker, but you can select which.

The CustodialSeg account segregates your positions from those of all other clients, as well segregating the assets you allocate for collateral, which remain with your own custodian. This minimizes transit risk associated with moving securities to and from SwapClear via your clearing member, and ensures that they remain identifiably yours. In a clearing broker default, we cannot draw on your allocated assets to meet losses of any other clients. Your positions port individually to another clearing broker of your choice.

 

Customer Protection under Dodd-Frank

In 2012, the CFTC introduced a new segregation concept in the US: LSOC – shorthand for “Legally Segregated, Operationally Commingled”. LSOC physically segregates customers from their FCM and ensures that a customer’s positions are legally segregated from all other customers and easily portable in the event of an FCM default.  All this while still maintaining the operational efficiencies that keep costs down. 

In addition to providing LSOC, SwapClear provides all FCM customers with a critical form of additional protection that we call “VM Seg”, shorthand for Variation Margin Segregation.  From the moment of an FCM defaults, SwapClear ceases the netting of variation margin across customers of that FCM, guaranteeing each customer is credited with 100% of its gains.  

For an in depth analysis of LSOC, please read our white paper:  LSOC; Principles and Implementation

 

Our FCMs are able to provide their clients with one of two variations of LSOC.

LSOC without Excess

LSOC without Excess provides all the protections we afford to US customers , but does not allow for a customer’s excess collateral to be segregated at LCH. We legally segregate your positions and the value of collateral posted to meet your initial margin requirement.  Although your collateral remains part of the pool that your FCM posts for its customers’ accounts, that value would never be used to margin, secure, or guarantee any other customer; before or after a default of your Clearing Member.

For an in depth analysis of LSOC Without Excess, please read our white paper:  LSOC; Principles and Implementation

 

LSOC with Excess

LSOC with Excess offers you the same type of segregation as for LSOC without Excess, but allows for excess collateral to be segregated at LCH.

Not only is your portfolio and initial margin legally segregated, but you can also deposit additional collateral which receives the same level of protection. If your FCM defaults, this extra margin can  help us to avoid liquidating your positions, reducing your risk of liquidation.

Additionally, LSOC with Excess may also make it easier for you to port your account to another FCM in a bankruptcy. Excess margin deposited with us may make you a more attractive client for porting since it is likely you will port with more collateral than you otherwise would.  For a short paper on the benefits of LSOC with Excess for customers, please read our paper:  LSOC With Excess Explained.

For an in depth view of LSOC With Excess, please read our white paper:  LSOC; Principles and Implementation