Saturday, February 13, 2010

LCH.Clearnet Hopes To Offer Swap Clearing To Japanese Banks

Original posted in the Wall Street Journal by Sarah N. Lynch:

London-based LCH.Clearnet, a major global over-the-counter derivatives clearinghouse, hopes to soon start offering Japanese banks access to its interest-rate swap clearing service, LCH.Clearnet Chief Executive Roger Liddell said Monday.

In an interview with Dow Jones Newswires, Liddell said LCH.Clearnet is currently negotiating with banks and regulators in Japan, and may be close to an agreement. If the plan eventually comes to fruition, Liddell said he envisions that the member Japanese banks would then be able to offer their clients access to the clearing platform as well.

"We have been spending quite a bit of time in Japan with some of the larger banks there, but also with the regulators and the central bank trying to agree on an access model that would allow the large Japanese banks to become members of our SwapClear service," Liddell said. "We haven't gotten there yet, but we think we are getting close."

LCH.Clearnet's efforts to push its business into the Asian swaps market comes as regulators in the U.S. and Europe are seeking to enact new rules of the road for derivatives following the global financial crisis. U.S. and European officials hope that by requiring some market participants to have their swaps cleared--a process by which a clearinghouse guarantees a trade to protect against default--the risk to the broader marketplace will be greatly diminished.

The U.S. House passed a bill last month that would require big banks to clear some of their swaps, and the Senate is expected to take up legislation with a similar provision in the coming weeks and months. The European Commission, meanwhile, is working on a similar proposal.

Asia has been much slower to push for the central clearing of swap products, in part Liddell said because there hasn't been as much political interest there as in Europe and the U.S. But banks and Asian regulators are starting to show more interest in the idea lately. In the fall, for instance, China announced it was launching a clearinghouse for interbank financial markets.

LCH.Clearnet is currently the leading clearer of interest-rate swaps, but it is looking to expand to other asset classes of derivatives. In March, it plans to become the third European platform to compete by offering clearing for credit-default swaps--a swap often blamed for its role in nearly collapsing American International Group (AIG) in 2008.

Once that is completed, LCH.Clearnet expects to turn its attention next to foreign exchange derivatives--a class of derivatives U.S. officials appear much less poised to regulate than some of their European counterparts.

The U.S. House bill that passed last month excluded certain foreign currency products from the clearing requirements. Liddell, who was visiting Washington, D.C., this week to track the development of derivatives regulations in the U.S. Senate, said he thinks it's a mistake to single them out from new clearing regulations.

"They are an asset class with risk attached to them. They are clearable," Liddell said.

Liddell said LCH.Clearnet is close to reaching a conclusion with major global banks "in the next few weeks" for the development of a foreign currency clearing platform. The European clearing company aims to first start clearing foreign currency options, and then branch out to other foreign exchange products based on market demand. He hopes to develop and test a platform this year in time to launch by early 2011.

As for LCH.Clearnet's plans to offer clearing to Japanese banks through its SwapClear service, Liddell hopes to have something finalized by the end of the year. Before that can happen, however, Japanese banks, regulators and the company still need to clarify if a Japanese legal entity can clear products through a foreign clearinghouse and if it would require a change in the law first.

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