Case Study No. 1:
Lehman Brothers: Managing the Lehman Brothers’ Default
In September 2008, SwapClear successfully managed Lehman Brother’s $9 trillion interest rate swap default by implementing our unique default management process.
The default comprised more than 66,000 trades. Within three weeks, the default was fully resolved, well within the margin held and at no loss to other market participants.
LCH developed this process with the clearing members, who play an invaluable role in providing trade expertise and access to market liquidity during a default.
Stephen O’Connor, managing director at Morgan Stanley and chairman of ISDA, said, “The aim of the default management process is to manage the closeout of a member institution in an orderly fashion, with the minimum of disruption to the markets and without incurring credit losses at LCH or at other member firms. LCH and the bank members of the default management group executed on a well-tested plan in volatile markets and achieved these goals with distinction.”
The Bank of England noted that the ability of LCH to close out positions without using up all available margin “illustrates the ability of a clearing house to protect market participants from bilateral counterparty risk, even in the event of default of a major participant.” (The Bank of England’s Financial Stability Report, October 2008)
Case Study No. 2:
Banca Monte dei Paschi di Siena (MPS) Capital Services
MPS Capital Services was quick to recognize the benefits of central counterparty (CCP) clearing. The corporate and investment banking arm of Italian MPS Group has a strong presence in bonds and related derivatives. The firm has a range of clients and counterparties, including financial institutions and corporates in Italy and around the world.
Why MPS clears with SwapClear
- Improved pricing
- Freeing Up Credit Lines
- Operational Efficiencies
- Regulatory Risk
In mid-2010, MPS adopted LCH’s SwapClear client clearing service, backloading a significant portion of its historical interest rate swap transactions (denominated in dollar, sterling and euro). In response to the changing regulatory environment, MPS recognized the benefits of reduced counterparty and default risk, as well as the freeing up of credit lines.
“MPS has seen a marked improvement in prices and speed of fills as a result of client clearing.” -- Matteo Bertotti, head of fixed income derivatives at MPS Capital Services
In addition to the improved pricing and speed, MPS have observed a number of operational efficiencies. The process of collateral management has been simplified. Meanwhile, the post-trade processing activity has improved through the automation and electronic confirmations offered by MarkitSERV.
From a technology perspective, MPS implemented automated transactions through inter-dealer brokers and electronic platforms, integrated internal post-trade systems, and introduced management reports from its clearing member, Barclays.
This is an important step for MPS in developing a leadership position in OTC derivatives, said Matteo Bertotti, “MPS is fully supportive of the expected EU regulatory reform toward central clearing.”
And while those reforms have yet to be implemented in full, MPS already finds itself in an advantageous position in the OTC interest rate swap market.