Member Notices

Business Streams

Originating department:SwapClear
Company Circular No:LCH.Clearnet Ltd Circular No 2624
 Service Circular No:No 068
Date:21 May 2010
To:All SwapClear Clearing Members

SwapClear DMP Fire Drill June 2010

 Dear SwapClear Member,

We will shortly be conducting a “fire drill” test of the SwapClear Default Management Process (DMP).

A DMP Fire drill is scheduled for the period between 14 and 22 June 2010.
Participation is mandatory for ALL SwapClear members.
This is a mandatory regulatory activity and all conclusions will be reported to FSA, including any non-compliance with this fire drill.

Given that LCH.Clearnet Ltd went live with the SwapClear Client Clearing Service (SCCS) in December 2009, the objectives of this year fire drill are to test successfully the capacity of LCH.Clearnet Ltd and its members to manage a default of a SwapClear Clearing Member (SCM), clearing for its own accounts and for clients. This will be achieved through simulation of all aspects of a default of a clearing member, and in particular:

          -   Phase 1: Risk neutralisation of the defaulting SCM portfolio, including liquidated client positions
          -   Phase 2: Transferring of clients to an alternative SCM (“back up SCM”)
          -   Phase 3: Auction of the defaulting SCM portfolio.

Phase 1 of the DMP fire drill will be a Default Management Group (DMG) exercise taking place on 14 and 15 June 2010 to exercise the Risk Neutralisation stage of the DMP. This session will involve only members of the DMG participating in a simulated instance of the hedging phase of the process.

Phase 2 of the DMP firedrill will take place on 14 June 2010 when LCH.Clearnet Ltd will be publishing the “stepping in” files and associated SwapClear reports by 11:00 UK time. No particular actions are required from members for this phase from an LCH.Clearnet perspective but members who are, or intend to be a clearing broker, are invited to identify and test the steps that they will have to take in order to onboard as an alternate SCM a client within 24/48 hours.

Phase 3 requires the participation of all SwapClear members, including new joiners.
All Members will be required to test and re-confirm their ability to manage the process of downloading a set of hedged currency dummy default portfolios (“the hedged portfolios”) from the LCH.Clearnet website, valuing these portfolios in their internal risk management systems and providing LCH.Clearnet with accurate valuations and bids on a timely basis.

The hedged portfolios that are produced following the hedging exercise will become the files for the member auction.
Four individual currency portfolios will be provided to members in the auction files: USD, EUR, GBP and AUD portfolios consisting of approximately 48 500, 20 000, 10 000 and 1000 trades respectively.

GUIDANCE NOTES FOR ALL AUCTION / VALUATIONS:

GUIDANCE NOTES FOR THE USD VALUATION:

GUIDANCE NOTES FOR THE SUBMISSION OF THE EUR AND GBP VALUATIONS:

GUIDANCE NOTES FOR THE SUBMISSION OF THE AUD VALUATION:

Members should ensure that all the appropriate internal data that is required to support the relevant valuations is available within their organisations. It is important to ensure that portfolios are correctly valued as per instructions above, as the success of the exercise will be measured by the proximity of members’ valuations of the hedged portfolios to LCH.Clearnet’s valuations.

Date and Time (UK) 

Activity 

14 June 2010
by 10:00
Stepping-in files (in csv and FpML formats) and corresponding SwapClear reports available on the SwapClear Member Reporting Test Site https://membertest.lch.com:444/ or on the secure area of the public website
16 June 2010
by 18:00
Auction files (in csv and FpML formats) and corresponding SwapClear reports available on the SwapClear Member Reporting Test Site https://membertest.lch.com:444/ or on the secure area of the public website
17 / 18 and 21 June 2010SwapClear reports refreshed and published on the SwapClear Member Reporting Test Site https://membertest.lch.com:444/ or on the secure area of the public website
21 June 2010
16:00
Deadline for members to submit “live” valuation in the form of a bid by-mail address defaultmgt@lchclearnet.com for the USD auction
22 June 2010 18:00Deadline for members to submit mid-price valuation in the form of a bid for the EUR. GBP and AUD auctions
23 June 2010LCH.Clearnet communicate auction results to members

All SwapClear members are obliged to participate in the DMP Fire drill. The test is NOT optional.
SwapClear members are signatories of the Default Management Process Agreement (DMPA) and are required to demonstrate that they can fulfill the obligations required of them therein. As the fire drill is a mandatory regulatory activity, all conclusions will be reported to the FSA, including any non-compliance with this firedrill.
Going forward, DMP end-to-end firedrill will be taking place every six month. Members are strongly recommended to put in place documented and formalised internal processes, as well as the necessary resources, to comply with the DMP fire drill.

To assist with communication, we will be establishing a mailing list to ensure that the appropriate people in each of the SwapClear member organisations receive information on the DMP process on an on-going basis. To that effect, we would be grateful if you could confirm back to us the appropriate DMP contact details.

Please do not hesitate to contact Christian Lee or Lois Blazy (or your usual SwapClear contact) if you require any further details.

Christian LeeLois Blazy
OTC IRD Risk Management Commercial Services
SwapClearSwapClear
LCH.Clearnet LtdLCH.Clearnet Ltd
+44 (0)207 426 7440 +44 (0)207 426 7452
christian.lee@lchclearnet.com lois.blazy@lchclearnet.com