LCH targets bank business with bilateral swaps launch

By David Wigan

Nov 4 (IFR) - Clearing house LCH has launched a service focused on the bank-dominated bilateral derivatives business, signalling its intention to expand beyond cleared products.

LCH said on Tuesday its new service, LCH SwapAgent, would increase standardisation, efficiency and simplicity in the bilateral derivatives market. The service is expected to go live in the first half of 2017 and will be available to any market participant trading interest rate derivatives.

LCH SwapAgent will offer credit support annex standardisation, end-to-end trade life cycle management, independent valuation and risk calculation, dispute elimination, payment netting and compression.

The move has the support of the dealer community because it will help banks shed the operational burden of a shrinking and complex business, LCH executives said.

"The bilateral market has been under stress, with higher capital charges and lower revenues and, as more and more trades move to clearing, that trend is set to accelerate," said Nathan Ondyak, global head of LCH SwapAgent. "With (Other OTC: WWTH - news) uncleared margin rules set to be applied to a wider set of trades in the coming months the community is looking for an opportunity to make the market more efficient."

Initial and variation margin was required for the largest US firms from September 1 for uncleared trades in the US$493trn derivatives market and the requirements are set to be expanded to European firms and the buyside from March 2017. The rules are expected to precipitate a surge in demand for collateral and related management services.

Once market participants join LCH SwapAgent they will be able to submit trades for migration to new standardised CSAs, requiring that margin payments are made in the same currency as the underlying transaction and based on preset risk factors.

"One of the impacts of bringing large parts of the swap market into central clearing was to create a clean standardised process, and by signing up to the SwapAgent rulebook you should be able to replicate that," said Ondyak. Counterparties will be able to submit new or legacy trades, he said.

In another example of the increasing role of financial technology firms in the derivatives value chain, TriOptima said last week that a number of financial market participants had recently joined its triResolve Margin service.

Companies including B&P Fund Services, Lansforsakringar Bank and the Bank of Ireland (EUREX: 1269463.EX - news) have signed up to the web-based collateral management service launched in January, with 20 clients now live.

"A historically high level of customisation in OTC derivatives collateral has contributed to current fragmented and manual operations," said Raf Pritchard, CEO of triResolve. "The new rules are a catalyst, driving standardisation, automation and centralisation of the collateral process." (This story will appear in the November 5 issue of IFR; Reporting by David Wigan)