Financial Markets and Exchanges Law by Michael Blair QC & George Walker & Stuart Willey

Author:Michael Blair QC & George Walker & Stuart Willey
Language: eng
Format: epub
Publisher: Oxford University Press
Published: 2012-03-25T16:00:00+00:00

Collateral obligations

12.103 Each clearing member of LCH is required to provide collateral to LCH in respect of its obligations from time to time to LCH under the contracts arising between the clearing member and LCH upon registration by LCH of the relevant transactions. The margin requirement of LCH is calculated on a net basis. Where a member provides cash to LCH as collateral, the cash becomes the property of LCH and the member becomes a creditor of LCH in relation to it. Non-cash assets that are provided as collateral (LCH decides what is acceptable collateral in its sole discretion) must be transferred to an account with LCH and, under LCH’s standard-form charge document, a first fixed charge is granted in favour of LCH to secure the performance by the clearing member of its obligations to LCH. The collateral provided by a clearing member must be legally and beneficially owned by the clearing member prior to transfer to LCH, or must comprise assets that are provided to LCH with the unconditional consent of the person who legally and beneficially owns such assets, and who has agreed that such assets may be transferred to LCH free of any claim or other interest of such person. (LCH requires such specific consent to be obtained from the relevant person in a document in LCH’s prescribed form.)

12.104 The amount of collateral to be provided by a clearing member is determined by LCH pursuant to the LCH Rules. The amounts required by LCH include amounts constituting initial margin, variation margin, and other forms of margin as appropriate for the different services. LCH has wide powers to vary margin requirements and to request additional margin from clearing members.

12.105 Initial margin may be provided in the form of various assets identified in the General Regulations, the nature of which may vary depending on the service in respect of which such margin is required. Variation margin is required to be delivered by way of cash payments made by the member to LCH in response to a call for margin by LCH. Such payments will be made by a debit to the clearing member’s relevant Protected Payment System (PPS) account.59

12.106 Since cash collateral, once provided to LCH, is an amount owed by LCH to the clearing member, any enforcement by LCH of rights against such collateral will operate by way of set-off. LCH has the right to set off any amount(s) standing to the credit of any one or more of a clearing member’s accounts in or towards payment or satisfaction of all or any of such clearing member’s liabilities to LCH in relation to other accounts. However, a member’s house account and client accounts are treated as separate accounts for this purpose; therefore LCH is not permitted to set off against cash collateral provided in connection with client account transactions amounts owed by the clearing member in respect of house account transactions, or to combine or consolidate house accounts with client accounts. (Similarly, if non-cash assets are to be

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