LCH (clearing house)

LCH (clearing house)
Name	LCH
Type	Clearing house
Foundation	0 2003
Location	London, United Kingdom
Industry	Financial services
Products	Clearing and settlement

LCH (clearing house). LCH is a leading multi-asset class clearing house operating globally, providing risk management and clearing services for a wide range of asset classes. Owned by the London Stock Exchange Group, it plays a critical role in the stability of the global financial system by acting as the central counterparty between buyers and sellers in numerous markets. Its operations are pivotal in mitigating counterparty credit risk and enhancing market transparency across interest rate swaps, repos, foreign exchange, commodities, and equities.

Overview

LCH functions as a central counterparty, interposing itself between trading counterparties to become the buyer to every seller and the seller to every buyer, a process known as novation. This structure significantly reduces systemic risk within the financial markets. The organization operates several key clearing services, most notably SwapClear for over-the-counter (OTC) interest rate derivatives and RepoClear for the bond repo market. Other major services include ForexClear for non-deliverable forwards, CDSClear for credit default swaps, and EquityClear for cash equities. Its main operations are headquartered in London, with significant entities also in Paris, under the LCH SA banner following the acquisition of the Clearnet business, and in other major financial centers like New York City.

History

LCH was originally established in 2003 through the merger of the London Clearing House, which dated back to 1888, and the Clearnet business of Euronext. This merger created a pan-European clearing powerhouse. A pivotal moment in its history came in 2008 during the global financial crisis, when it successfully managed the default of Lehman Brothers, preventing widespread contagion and proving the resilience of its risk management framework. In 2013, the London Stock Exchange Group acquired a majority stake, further consolidating its position. The group later completed the full acquisition of the remaining stake from a consortium of users, including major investment banks like Goldman Sachs and J.P. Morgan Chase.

Services and operations

LCH offers clearing across multiple asset classes, with SwapClear being its largest service by volume, handling the vast majority of the global cleared OTC interest rate swap market. RepoClear provides clearing for fixed income repurchase agreements across markets in Europe and the United States. For foreign exchange derivatives, ForexClear focuses on products like non-deliverable forwards. The CDSClear service manages credit default swap indices, while EquityClear handles transactions for cash equity markets, including those on the London Stock Exchange. These services operate on sophisticated electronic trading platforms and are supported by robust settlement links with central securities depositories such as Euroclear and Clearstream.

Risk management

The cornerstone of LCH's operations is its multi-layered risk management framework, designed to protect the clearing house and its members from default. This system employs daily mark-to-market valuation of all positions and the collection of initial margin and variation margin. A key component is its substantial default fund, contributed to by all clearing members, which acts as a mutualized buffer against losses. The models for calculating margin (finance) requirements, such as those for SwapClear, are regularly stress-tested against extreme but plausible historical scenarios, including events like the 1998 Russian financial crisis and the European sovereign-debt crisis. This approach is overseen by its Risk Committee and is subject to rigorous scrutiny by regulators including the Bank of England.

Regulation and oversight

As a systemically important financial market infrastructure, LCH is subject to stringent regulatory standards on a global scale. Its main U.K. entity, LCH Ltd, is regulated by the Bank of England under the European Market Infrastructure Regulation framework and the U.K.'s own Financial Services and Markets Act 2000. Its French entity, LCH SA, is supervised by the Banque de France and the Autorité des Marchés Financiers. In the United States, its services are overseen by the Commodity Futures Trading Commission and the Securities and Exchange Commission. It must comply with international principles set by the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions.

Notable incidents and developments

Beyond the critical handling of the Lehman Brothers default in 2008, LCH has been central to several major market developments. It played a key role in the implementation of the Dodd-Frank Act and European Market Infrastructure Regulation by expanding OTC derivatives clearing. In 2019, it successfully managed the volatility surrounding the Italian government bond market. A significant strategic development was the launch of its "SwapAgent" service, designed to extend clearing to more bespoke, non-standard OTC derivatives. The ongoing expansion of its services, such as clearing for the Secured Overnight Financing Rate market following the transition away from the London Interbank Offered Rate, continues to shape the post-crisis financial landscape.

Category:Clearing houses Category:Financial services companies based in London Category:London Stock Exchange Group