SwapClear service has an innovative Default Management Process designed specifically to meet the nonstandard requirements of OTC IRS. After the successful closeout of Lehman’s OTC IRS portfolio in 2008, the process has become the market standard for OTC IRS.
Default Management within SwapClear service is a four-step process:
Risk Neutralization & Client Porting: SwapClear’s primary goal after the default of a clearing member is to reduce the risk of the outstanding positions. Upon a default, SwapClear Operations immediately facilitates the porting of nondefaulting clients to solvent clearing members. SwapClear then begins hedging the portfolio via its Default Management Group (DMG), a revolving group of senior rate traders from the major IRS market makers that are seconded to LCH in the event of default.
The DMG meets periodically throughout the year and participates in our default fire drills to ensure preparedness in the event of a default.
In the meantime, SwapClear Operations facilitates the porting of nondefaulting clients to solvent clearing members.
- Portfolio Auction: Once the risk of the portfolio is substantially reduced by the DMG, SwapClear has the ability to separate the defaulter’s portfolio by currency and then (at the discretion of the DMG) into small sub portfolios within that currency. The DMG then conducts an auction for each portfolio. The ability to operationally receive and price an auctioned portfolio is one of the criteria validated by SwapClear prior to granting membership. Further, the operational capabilities of each member during a default are tested regularly via our fire drill.
- Loss Attribution: For losses greater than the financial resources of the defaulter, the funded Default Fund contributions of the SwapClear members will be attributed into tranches based upon bidding behaviour in the auction:
Tranche 1 – Non Bidders
Tranche 2 – Auction Bidders (not winner)
Tranche 3 – Auction Winner (plus those with same bid as winner