SA Margin methodology

LCH's robust risk management framework – underpinned by a team of over 50 dedicated risk managers – affords exceptional levels of protection to clearing members.

Initial and variation margin is collected from LCH members; should they fail, this margin is used to fulfil their obligations.

The amount of margin is decided by LCH's risk management teams, who assess a member's positions and market risk on a daily basis.

The Cash securities margin is structured around a core risk module, a VaR based risk framework and a set of Additional Margins:

• Total Initial Margin (TIM):
  • Initial Margins:
    • VaR based measure initial margin; 
    • Pool initial margin: for position not eligible to VaR;
  • Wrong Way Risk (indirect - WWR): covers the contagion effect in the financial, insurance and bank sectors;
  • Event Risk (ER): a floor to Initial Margin and WWR, to cover idiosyncratic tail losses on concentrated positions;
  • Self-Referencing Risk (SRR) Margin (direct Wrong Way Risk): covers the direct self-referencing risk; 
• Additional Margins:
  • Liquidity and Concentration Margin (LCRM): captures the market liquidity risk given position size and concentration;
  • De-Netting and settlement Risk (DNR): covers the de-netting effect of cash security physical settlement;
  • Legal Entity identifier Margin (LEM): captures the non-linearity effect linked to the default of a legal entity while margin being computed as independent margin account. 
• Contingency Variation Margin (CVM): the unrealized PnL of the portfolio.