ANALYSIS: LCH SA plans push into US credit derivatives clearing - CEO

CDSClear, the credit derivatives clearing house operated by LCH SA, has been running for nearly 15 years, having emerged to support the clearing of credit default swaps (CDS) mandated after the collapse of Lehman Brothers.

In that time, CDSClear has grown to support more European and US products than any of its rivals, with more than 500 single name and 100 credit index derivatives.

More recently, LCH SA has been reacting to the decision by its main rival Intercontinental Exchange to close in October last year its European credit clearing service and move that business to the US.

Poilvet-Clédière told FOW: “When ICE made their decision in 2023, we had a bit more than a third of market share in Europe which made us a credible alternative. Since then, we have been able to attract about 70% of the residual ICE European market share.

“Add to this the global expansion of our product suite over the past few years, we delivered another record year in 2023, with notional cleared up 41% across all products and client notional up 93%. This record activity has continued into 2024.”

LCH CDSClear now supports US indices and single names, European indices and single names, and credit index options.

Asked about the credit index futures launched this year by exchanges such as CME Group, Eurex, Cboe Global Markets and most recently ICE, Poilvet-Clédière said: “When products are launched by various exchanges, we can adapt to them easily because the futures expertise for us is not a major stretch. While this could be an opportunity, the key target for us right now is our expansion into the US. CDSClear has onboarded BNP Paribas Securities Corporation and Morgan Stanley & Co LLC as US futures commission merchants (FCMs), and in Q3 2024, we saw record global market share for US$ CDX™ and iTraxx® indices.”

CDSClear’s plan to expand into the US takes that business into direct competition with ICE Clear Credit, the main US credit clearing house, but Poilvet-Clédière sees an opportunity to use LCH’s US foothold provided by its interest rate swap clearing service: “We are going to be leveraging our network presence as LCH more broadly, specifically SwapClear’s big presence in the US.”

The LCH SA chief executive is also changing the service to make it more attractive to US clients, this includes “dollarising the clearing house”.

“The US dollar is already accepted on a case-by-case basis but we are now embarking on a three-year technology transformation to dollarise the system side-by-side with the euro. That is a competitive advantage because our service is the only CDS clearing offering that has both the European (EMIR) and US (FCM) compliant clearing models, so we are creating a single pool of liquidity across currencies.”

The Paris-based clearing house is also tweaking its margin model to make it more “defaulters-pay-first” whereas the previous model “had a level of mutualisation in CDS that was proportionally a little bit higher”, according to Poilvet-Clédière.

She added: “From our experience, we think you should margin together what you would liquidate together at the time of a crisis. This being said, you can still be innovative in appropriate portfolio margining while keeping your standards high.”

Another key component of the CSDClear US strategy was the appointment in June this year of Marcus Robinson, formerly LSE Group’s head of post-trade strategy, to run the clearing service.

Poilvet-Clédière said: “Our head of CDSClear, Marcus Robinson, used to run SwapClear in Asia and was part of the team that delivered SwapClear's expansion into the US.”

Looking ahead into 2025, the LCH SA chief executive said a priority is regional expansion: “We are increasingly servicing European clients, UK asset managers and global hedge funds but there are others such as US clients, US hedge funds and Asia Pacific clients that we are contemplating.”

To be continued on Friday December 20