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LCH's CDSClear launches credit index options clearing

First Published 19th December 2017

CDSClear launches clearing of credit index options on the IHS Markit iTraxx Main 5Y and IHS Markit iTraxx Crossover 5Y indices

LCH has extended its CDSClear platform to include the clearing of credit index options. This addition to LCH's credit derivatives clearing service follows the launch of CDX high-yield clearing in July 2017.

LCH's risk framework for the clearing of credit index options has been approved by European and French regulators, under the EMIR framework, as well as US regulators (CFTC and SEC). MarkitSERV, the post-trade service from IHS Markit, will process cleared credit index options for both dealer-to-dealer and dealer-to-client flows.

Features of the risk framework include:

  • Portfolio Margining the service will bring initial margin benefits from full cross-margining of options with indices and single names
  • Margin Optimisation multi-lateral netting from facing a single counterparty (LCH) will provide margin and capital benefits
  • Operational Risk Reduction the ability to bring numerous bilateral counterparty exposures down to a single net exposure to the CCP per instrument will improve the options exercise process
  • Funding Benefits with uncleared margin rules, clients and members will be better able to manage bilateral initial margin versus cleared initial margin

The CDSClear credit index options rollout will be introduced in two phases. Phase one will cover both interdealer and client flows for 1-month, 2-month and 3-month expiries on underlying CDS indices from IHS Markit, namely: iTraxx Main 5Y OTR & OTR-1 series and iTraxx Crossover 5Y OTR & OTR-1 series. Phase two, subject to regulatory approval will involve 1-month, 2-month and 3-month expiries on the underlying indices of: CDX IG 5Y OTR & OTR-1 series and CDX HY 5Y OTR & OTR-1 series.