Clearing house of the year: LCH

Rohit Verma, who joined LCH in July last year as head of Asia-Pacific, doesn’t believe salespeople alone can carry the clearing house’s regional aspirations. It is all about product capabilities and technical expertise, he insists – and it is this strategic focus that has continued to win accolades with clients this year.

“We are in a business where you don’t need to over-sell; you need to solve problems,” Verma says. “We have people who understand rates and we have people who understand capital. This helps us work with clients on their cost-benefit analysis, to make sure the products they subscribe to make economic or strategic sense. We only want to sell propositions that meet market needs.”

Clients certainly appreciate this attention to product development. “LCH is constantly improving its clearing service in the region, in terms of coverage and the tenors they offer,” says the relationship manager for SwapClear, an LCH service, at one Australian institution. “The clearing house really tries to listen to the market, take on feedback and then present a business case to facilitate that demand.”

It has been less than four years since LCH made the first hire for its Singapore office, transforming the small rep office there into a fully-operational unit and thrusting the UK-headquartered firm into the centre of the Asian clearing universe.

Verma’s predecessor was based in Australia, which is where LCH began to build out its presence across the region, while Verma himself is based in Singapore – a telling shift in priorities.

“We can’t be a house that is just Australia, Japan, Singapore and Hong Kong. We also need to be meaningfully present in China, Korea, Taiwan, Indonesia, India,” says Verma. “We use local connectivity to understand what clients want and then work towards solving this.”

In terms of volumes, LCH has had an exceptional 12 months, on both the rates and forex side, with some months breaking historical records. Asia SwapClear volumes have increased 18% since 2020, while foreign exchange volume is up 12% for deliverable trades and 14% for non-deliverable ones.

At the same time, LCH’s margin model has held up well during these periods of sharp margin movement, thanks largely to the clearing house’s pro-cyclicality floor, which prevents margin requirements dipping below a certain minimum level during periods of market calm.

Product refinements

A couple of improvements that LCH has made to its Asian offering over the past 12 months stand out.

One was extending trading hours from 16 to 22 hours across the region: vitally important for cutting credit risk exposure for institutions that trade during Asian hours.

This was not a trivial change to implement, since the downtime was when LCH would do all its end-of-day processing, such as quality control checks, trade valuations and margining. To extend its opening hours, the central counterparty (CCP) had to shorten the time taken to complete these processes, which also meant revising the sequence and timing of other processes that depended on them.

We have people who understand rates and we have people who understand capital. This helps us work with clients on their cost-benefit analysis, to make sure the products they subscribe to make economic or strategic sense

Rohit Verma, LCH

Later this year, LCH plans to extend trading hours to provide a fully 24-hour service, which will be even more challenging.

The other change at the clearing house has been to broaden the range of collateral it accepts to include the Singaporean dollar.

This change was also not easy for LCH to implement, and indeed took a year longer than was originally anticipated.

LCH finally managed to pull everything together in October, and now has nearly S$800 million (US$580) worth of margin being paid by international institutions in either Singapore securities or cash.

The CCP wants to eventually accept Chinese securities and cash as collateral, but this could still be some years away.

“We’ll need a backstop. We’ll need the plumbing through the local infrastructure. And, if we’re going to take non-cash, we’ll need the ability to liquidate when there’s a default. We’re doing the groundwork now to assess the feasibility of this,” says Verma.

NDF trades

A core priority of LCH in future is to increase its market share of cleared non-deliverable forward (NDF) trades. This is a hugely important market for Asia, with the bulk of NDF trading being done in Asian hours, and the major currencies of Chinese renminbi, Korean won, Taiwanese dollar and Indian rupee all being from the region.

A significant proportion of NDF trades – 43% according to the most recent triennial survey from the Bank for International Settlements, published in 2019 – are already cleared through LCH’s ForexClear platform.

But that isn’t enough for the ambitious clearing house, which has plans to grow its market share to more than 50%. This goal is made harder to achieve by the fact that, unlike in the interest rate swaps world, few countries impose mandates for FX clearing.

“Near-50% market share matters because risk managers are not generally comfortable being outside of the more liquid segment of the market,” says Verma.

Although growing market share in this area could be tricky, a new NDF matching venue, which LCH plans to launch next August, could help.

“When people trade an NDF, it is up to them whether they want to clear it or keep it bilateral – and they can decide this post-trade,” says Verma. “This makes price incentivisation difficult, as the intention to clear is not obvious at the point of execution.”

Having a clearing-specific trading venue enables straight-through processing of workflow and provides certainty of clearing at the point of execution.

It also makes it easier to pass on the benefits that come from multilateral netting via pricing on this venue, says Verma.