LCH Ltd’s SwapClear service has gone live with a new clearing model introduced by the Futures Industry Association (FIA), designed to increase banks’ clearing capacity.

It was developed in collaboration with the Bank of America, Barclays, Citi, Goldman Sachs and J.P. Morgan, LCH Ltd., and Linklaters as external legal counsel.

The model broadly replicates the futures commission merchant (FCM) clearing model in the US for banks which face additional capital charges when when they clear OTC derivatives for their clients under the principal model. It is intended to co-exist with, rather than be a substitute for, other clearing models available in Europe.  

Linklaters developed the model under English law, which means that UK-based clearing members of SwapClear can offer the EATM to their clients, irrespective of their clients’ location. An equivalent structure is currently being developed under German law. 

How it works

This differs from Europe’s predominant ‘principal model’ in which clearing members act as financial intermediaries between their clients and the CCP.   

Under the EATM, clearing members may enter trades with a CCP on behalf of their clients and hold those trades on trust for those clients.

This means that under the EATM, a clearing member is party to one transaction – the client transaction with the CCP, whereas under the principal model, it is party to two transactions – one with the CCP and one with the client.  

“By effectively removing the double-counting, the EATM will help increase the capacity of clearing members offering client clearing in Europe through cost savings and efficiencies,” said Walt Lukken, FIA president and CEO. “The EATM provides welcome capacity for clearing services at a time of unprecedented growth in our markets.” 

The EATM replicates many features of the US FCM clearing model and was made possible by significant developments and improvements in the understanding of the legal underpinnings of the US version. 

What’s next

While LCH Ltd and Eurex Clearing have been involved in the project from the start, the EATM is designed to be CCP-neutral and can be offered by any European CCP.

Eurex Clearing is in the process of implementing the same model and will inform market participants once it has been completed. Both CCPs also intend to implement the EATM in due course for Germany-based clearing members.