Europe's biggest clearing house may set a 15% cash deposit margin on Irish bond
daily trading of about €8bn. Meanwhile, the
Irish 10-year bond yield rose to 7.62% Thursday.
Bloomberg has reported that member firms dealing in Irish debt on LCH.Clearnet’s RepoClear platform are likely to see margin requirements rise to
15%, based on an exchange rule announced in October, which calls for the
re-evaluation of margin requirements when sovereign spreads begin trading
convincingly beyond 450 basis points versus the Bloomberg Fair Value sovereign benchmark
index for euro-ten-year issues.
The Irish 10-year bond yield rose to
7.62% Thursday, breaking a day-old record of 7.45%.
The equivalent German bund yield was 2.4%.
The premium or spread for buying Irish bonds was
522 basis points or 5.22%.
Meanwhile, also on Thursday, the annual cost of default insurance for €10m worth of
Irish debt as measured by credit default swaps rose to a record €600,000.
LCH.Clearnet
said in a circular that was issued on Oct 5th:
The framework intends to cover three main
areas: ‘jump-to-default’; market liquidity; and ‘wrong-way’ risk where
the clearing member and sovereign issuer are highly correlated:
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LCH.Clearnet Ltd monitors the yield
spreads between 10-year bonds from each sovereign issuer and
benchmark 10-year AAA government bonds. We would generally consider
a spread of 450 basis points over the 10-year AAA benchmark to be
indicative of additional sovereign risk and LCH.Clearnet Ltd may
materially increase the margin required for positions in that
issuer. As a guide, materially would likely mean an increase in
the order of 15% of position size, with further material increases
in margin charged as the spread deteriorates further. We will also
consider whether additional margin is required from indicators in
CDS prices or Market Implied Rating data.
-
Where a sovereign issuer is downgraded
to sub-investment grade by a major rating agency we would generally
expect market liquidity to be significantly impacted and may seek to
apply additional margin for positions in that issuer.
-
If a Clearing Member and sovereign
issuer subject to increased ‘jump-to-default’ risk are highly
correlated (‘wrong-way’ risk) we would also seek additional margin.
Traders would have to lodge funds equal to 15% of
their trades with LCH, which handles about €8bn of
Irish bond trades daily, John Burke, head of fixed
income at LCH in London told Bloomberg.
The Financial Times reports that Ireland and Spain
have been removed from a list of countries in which Russia’s $130.9bn sovereign
wealth funds is permitted to invest, according to the Russian finance ministry’s
website. Norway’s $520bn fund said the past few weeks had seen Spanish debt grow
a lot less attractive.
In common with Greece, more than 80% of Irish
public debt is funded by foreign lenders.
