SwapClear is the benchmark for risk management of centrally cleared over-the-counter (OTC) interest rate derivatives.

We designed SwapClear’s risk management framework specifically to meet the unique requirements of OTC interest rate swaps. As such, many of our risk management methods have become the market standard, including our initial margin, valuation, and default management processes.

SwapClear’s fundamental purpose is to ensure the financial performance of all interest rate derivatives cleared via our service, should a clearing member default. In a default, LCH becomes responsible for the cleared positions of the defaulted clearing member and must (a) make good on any losses borne by the defaulter and (b) hedge and transfer the defaulter’s open positions. In order to manage outstanding notional volumes in excess of 420 trillion USD, we have designed state-of-the-art safeguards to protect our clients, clearing members and the stability of the global financial system.

Six ways we protect clients and clearing members:

  1. Membership Criteria

    SwapClear employs rigid and transparent requirements for clearing members, ensuring that they have the necessary expertise and operational competency to appropriately value, risk manage and default manage OTC IRS. Once admitted, members must participate in periodic fire drills to continually validate their operational readiness.

    View the full details of our membership criteria.

  2. Initial Margin

    Initial margin is collected from each member to cover potential losses in the event of a default.  SwapClear initial margin is calculated using LCH’s proprietary PAIRS (Portfolio Approach to Interest Rate Scenarios) margin methodology.  PAIRS is an expected shortfall model based on filtered historical simulation incorporating volatility scaling. The model uses ten years of historical market data to simulate changes in portfolio value from which an estimate of the potential loss distribution is calculated.

    In addition to PAIRS initial margin, SwapClear applies margin add-ons covering Credit Risk and Liquidity Risk where a particular member’s inherent risk exposure is not captured within the PAIRS model.

    For complete details on SwapClear’s initial margin methodology or to estimate your initial margin requirements via the SwapClear Margin Approximation Tool (SMART), please contact us.

  3. Variation Margin

    The value of individual interest rate swap contracts changes throughout each trading day. SwapClear conducts a valuation of each individual contract (known as “marking to market”) and collects losses from participants on the losing side of the trade to pay gains to participants on the gaining side of the trade. A participant’s daily gain or loss is known as the participant’s “variation margin.”

    By collecting variation margin, SwapClear ensures that members are current on all obligations and avoids default scenarios where member losses have accumulated over a prolonged period of time.

    Many of our valuation principles have become the market standard for cleared OTC IRS, including OIS discounting and price align interest.

    SwapClear provides complete transparency into our valuation methodology. For the complete details, please contact us.

  4. Default Management

    In the event of a default of a clearing member, LCH must hedge and transfer the defaulter’s positions while meeting the financial obligations of the defaulter. At inception, SwapClear’s Default Management Process was revolutionary for centrally cleared products. After the successful closeout of Lehman’s OTC IRS portfolio in 2008, the process has become the market standard for OTC interest rate swaps.

    View the complete details of our Default Management Process.

  5. Default Fund

    In the event of a default of a clearing member, LCH must meet the financial obligations of the defaulter. To do so, SwapClear employs a robust default waterfall designed to ensure the performance of cleared interest rate swaps in the worst of scenarios.

    Default Management

  6. Portability

    SwapClear’s portability options are designed to allow clients to transfer the value of their collateral and avoid double margining.

    For more information about our portability model, please contact us.