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News : Irish Economy Last Updated: Nov 5, 2010 - 3:28:38 PM

Europe's biggest clearing house may set 15% cash deposit margin on Irish bond daily trading of about €8bn
By Finfacts Team
Nov 5, 2010 - 5:26:08 AM

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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:

  • 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.

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