Futures Commission Merchant Regulation - Comment Letter - LCH.Clearnet - January 18, 2011

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Protection of Cleared Swaps Customers Before and After Commodity Broker Bankruptcies
January 18, 2011

In their comment letter, LCH.Clearnet (The Group) “believes it is of the utmost importance that DCOs are managed prudently. Accordingly, their risk waterfalls must cater for all events, not just shock events. This requires that DCOs clearing Swaps must always assume that no client Initial Margin is available at the point of a default, as this is the most conservative assumption from a risk management standpoint.” In respect to the models proposed by the Commission, the Group believes the LSOC model is both the optimal and most achievable model for providing the client collateral protection levels sought by Congress. LSOC offers a greater level of client protections than the other options, “without wholly altering the DCO and FCM infrastructure that is already in place for clearing, risk managing and default managing Swaps. The LSOC model facilitates broader client participation in Swaps clearing, as it allows an FCM to exchange client collateral for alternative higher quality collateral that is eligible for submission to the DCO.”



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