LCH proposes extension of US Treasury collateral use in CDS clearing

LCH SA on Monday filed a self-certification with the Commodity Futures Trading Commission (CFTC) to significantly expand the range of US Treasury securities that clearing members may post as margin for its credit default swap (CDS) clearing services.

The London Stock Exchange Group (LSEG)- owned clearinghouse currently approves Treasury bills as eligible margin collateral for its CDSClear clearing members. It is now aligning its CDS clearing framework more closely with its other clearing divisions that already accept a wider range of U.S. government securities.

The proposed changes come after LCH filed a self certification with the CFTC in March to modify rules governing central counterparties, clearing members and contribution to cover losses in the event of default.

LCH said the extension of US Treasury collateral responds to demand from clearing members for greater flexibility in collateral usage.

The firm said that US Treasuries remain highly liquid and creditworthy, and that the revised framework preserves its ability to liquidate collateral in the event of a member default.

Despite expanding eligibility, LCH SA is tightening its risk controls. The proposal sets a minimum issuance size of $500 million (£372 million) per security and restricts eligible maturities to between three days and 30 years. Certain instruments, including zero-coupon bonds (with limited exceptions), stripped securities, and perpetual bonds, remain excluded.

The clearinghouse proposes a $2 billion (£1.48 billion) cap on Treasury inflation-protected securities per clearing member and group, alongside a reduction in issuer-level concentration limits from 25% to 20% of outstanding issuance.

LCH said that haircuts will vary by maturity, ranging from roughly 0.5% for short-dated securities to more than 16% for long-dated bonds. TIPS will follow a separate haircut schedule reflecting their inflation-linked structure.

The filing marks the latest step by LCH to broaden the pool of non-cash collateral.

This latest extension of eligible collateral comes after the CFTC approved LCH’s proposal of self-certification submitted earlier last month for the extension of eligible non-cash collateral to China government bonds (CGBs) in CNH (offshore renminbi).

The LCH had filed another self-certification with the CFTC in May, proposing the extension of eligible non-cash collateral from some major multilateral development institutions.

Meanwhile, the CFTC has enhanced its electronic filing system for product self-certifications on Monday, allowing exchanges to submit one consolidated filing for multiple contracts.