NYSE Euronext LIFFE Equity Derivatives

Changes to Margining and Settlement

LCH.Clearnet intends to move all equity settlements onto the EquityClear platform. This rationalisation will allow for future service enhancements.

There is some member impact:

• There will be a small change to the matching criteria for the settlement of the cash leg of the Stock Contingent Trades.
• LCH.Clearnet margining will be calculated using the Equities Risk Analysis (ERA) methodology, and cross margined with other cash equities on the EquityClear platform.
• There will be some changes to the existing Equities Margining System (EMS) reports published to TRS/CPS.

Further details are given below. The planned implementation date for this change is 14 December 2009.

Current Margining Process

Currently all single stock options and single stock futures, including Stock Contingent Trades (option leg) are margined (Initial Margin and Net Liquidation Value) in TRS/CPS using London SPAN until the expiry date. Stocks in delivery due to futures and options expiries also continue to be margined (IM & Contingent Variation Margin) in TRS/CPS until the intended settlement date.

From the close of business on exercise date until intended settlement date CVM and IM is calculated in TRS/CPS using London SPAN on all Stock Contingent Trades (option leg). Initial Margin and CVM is calculated in EMS for SCT (cash leg). If the settlement fails on the intended settlement date then the positions are margined (IM & CVM) in EMS until settlement.

EMS uses a flat rate which is applied at a single % rate to all positions irrespective of the underlying.

Summary

Stock Contingent Trades

• Option
  • Margined (IM & NLV/CVM)  in TRS/CPS up until intended settlement date
• Stock position (cash leg)
  • Delivery Margined (IM & CVM) in EMS upon registration

LIFFE single-stock Options/Futures

• Option/Future
  • Margined (IM & NLV/CVM) in TRS/CPS  until intended settlement datex

All failed trades, regardless of category, are margined in EMS. The trades therefore cease to exist in TRS/CPS and are margined in EMS using the flat rate as defined above.

This is illustrated in the process flow below.

New Margining Process

All instances where margining is currently in EMS, i.e. stock contingent trades (SCT) in delivery (cash leg) and all failed settlements will be replaced by margining on EquityClear platform using the ERA margining methodology. ERA uses a portfolio margining methodology – which will therefore allow NYSE Euronext LIFFE positions to be offset against a Member’s other positions held in EquityClear. No current TRS/CPS margining is effected by this  change.

Full details of the ERA algorithm are provided in a separate document, the ERA TIP (Technical Information Pack), which is available on the LCH.Clearnet website at http://www.lchclearnet.com/images/lch%20era%20tip%20v2.0_tcm6-44499.pdf.

Additional information on EquityClear can also be found at:

http://www.lchclearnet.com/risk_management/ltd/margining/equityclear.asp.

These include an overview of margin terminology and the algorithm, full calculation details and worked examples including full test data.
LCH.Clearnet publishes its margin parameters. Current and historical data can be found on our website at http://www.lchclearnet.com/data_downloads/ltd/era.asp . Interested parties can use these to determine the margin requirements for portfolios they may wish to test.
Further information regarding the ERA margin methodology is available on request.

Summary

Stock Contingent Trades

• Option

  • Margined (IM & NLV/CVM)  in TRS/CPS up until intended settlement date

• Stock position (cash leg)

  • Delivery margined (IM & CVM) in EquityClear upon registration and up until intended settlement date

Liffe single stock Options/Futures

• Option / Future

  • Margined (IM & NLV/CVM) in TRS/CPS up until intended settlement date

All failed settlements (both as a result of SCT and LTO/FUT i.e. regardless of category) will be margined in EquityClear. The fails therefore will cease to exist in EMS and will be margined in EquityClear using ERA as defined above.

This is illustrated in the process flow below.

Changes to Stock Contingent Trades Reports

Currently, there are 3 reports for Stock Contingent Trades. They provide Margining, Pricing and Reconciliation views.

1. SCT Reconciliation Report. This report is maintained with no changes.

2. SCT Margin Report. This report is maintained, but will be renamed to “SCT Position Report”.  There is a requirement to remove the margin information on this report as EquityClear will be calculating the margins.    
   
    The following fields will be removed: Variation Margin, Initial Margin and Margin displayed. This is illustrated in the diagram below:

The new SCT Position Report can be used to map the option to the ISIN.

3. SCT Price Report. This report is maintained, but will be renamed to “SCT Security Reference Report”. There is a requirement to remove the Price and % Mgn Rate as these values are no longer used for margining.  

The changes are illustrated in the diagram below:

EquityClear produces a Price.csv file containing the prices used in the margin calculations. The Price.csv file is posted to our website at http://www.lchclearnet.com/data_downloads/ltd/era.asp each time a margin is posted to Banking. The file will be by ISIN and will include historical prices for 251 days to date.

An example of the Price.csv file is illustrated below:

Consolidation of Crest Accounts

Currently, members are required to input their Crest settlement instructions for Stock Contingent Trades against LCH account 35501 and for Equity Derivative expiries against LCH account 355. As part of this migration we intend to consolidate all LIFFE derived settlement instructions into LCH account 355. Members will therefore be required to book all SCT trades against LCH Account 355.

If you require further information on these changes please contact:

Commercial Services: Marc Huglin (marc.huglin@lchclearnet.com)
Risk Management: Victoria Collins (victoria.collins@lchclearnet.com)
Business Operations: Martin Jenkins (martin.jenkins@lchclearnet.com)

Glossary of Terms Used