Innovative clearing solution for Gilt general collateral repo trades
LCH.Clearnet Ltd (LCH.Clearnet), the global clearing house, has launched Term £GC to enhance the central clearing of gilt general collateral (GC) repo trades.
Developed as a joint initiative with Euroclear UK & Ireland Ltd. (EUI), the London Money Market Association (LMMA) and gilt repo market participants with support from the Bank of England, the launch of Term £GC is an important milestone for the gilt repo market and will reduce the current operational and liquidity risk in managing gilt GC repo transactions.
Term £GC incorporates an innovative dual netting feature designed to optimise netting opportunities for LCH.Clearnet’s members and utilises an enhanced delivery by value settlement mechanism at EUI that eliminates the requirement for daily return of cash and collateral for term trades. Trades in Term £GC will be executed on the leading repo automated trading systems and via voice brokers.
Importantly, building on the introduction in April of RepoIQ, the VaR based margin methodology for the Fixed Income service, LCH.Clearnet also supports a margin offset for Term £GC against trades in specific-ISIN UK Gilts, thus reducing the cost of clearing for banks active in the gilt repo market.
John Burke, Executive Director, Fixed Income at LCH.Clearnet said: “We have worked closely with the gilt repo market to ensure that the design of Term £GC delivers the essential benefits of reduced operational risk and an improvement in how Sterling settlement liquidity is managed. We would like to thank gilt repo market participants and industry stakeholders who have worked with us to design, test and implement the Term £GC product and for their support in delivering this product to the market.”
John Trundle, Chief Executive Officer at Euroclear UK & Ireland, said: “Euroclear is delighted to have partnered with LCH.Clearnet, the LMMA and the Bank of England, to bring this Term £GC product to the market. It reduces liquidity risks and increases operational efficiencies in the money market. Risk reduction and efficiency in the markets we serve are the core purposes of EUI so we have been pleased to develop our delivery by value collateral services in this way. The new term arrangements, including collateral optimisation and substitution, have enabled the market to move away from the daily roll-over of cash and collateral to an efficient process where the requirements to settle securities are aligned with the maturity of the underlying GC transactions.”
Ian Mair, Chairman of the LMMA, comments: “The LMMA is pleased to have contributed to the introduction of Term £GC. It not only benefits the gilt repo market because it reduces risk, it also enhances liquidity management and just as importantly provides a clear financial stability benefit for the whole market.”
LCH.Clearnet plans for Term £GC to replace the existing Sterling GC product and a migration strategy has been agreed with market participants that will support a move of trading liquidity from Sterling GC into the Term £GC product in Q4 2014 and for any open positions in Sterling GC to be switched into the Term £GC product in 2015.
