Clearing houses play a critical role in the financial markets by acting as intermediaries between buyers and sellers. They ensure the successful execution of derivatives, securities and foreign exchange transactions. One of the world’s leading clearing houses is LCH.

LCH provides clearing services across multiple asset classes including equities, bonds, repos, energy, freight, foreign exchange derivatives, interest rate swaps, credit default swaps and more. It has a long-standing history dating back over 100 years and facilitates billions of transactions annually across 15 government exchanges.

A Brief History of LCH

LCH can trace its origins back to 1888 when the London Clearing House was established. At the time, London was the global center for commodity trading and the clearing house helped reduce settlement risks and costs. In the 1960s, London also became a major international financial hub which led to the rise of new financial instruments like derivatives.

In 2003, the London Clearing House merged with Clearnet to form LCH.Clearnet which went on to become one of the world’s leading clearing providers over the next decade. The group expanded through several strategic acquisitions including acquiring the UK arm of the Italian clearing house CC&G.

In 2014, LCH.Clearnet Group was acquired by the London Stock Exchange Group. The clearing business was rebranded to LCH in 2016. Today, LCH continues to leverage its strong heritage while expanding into new markets and asset classes. Its global footprint extends across 13 countries and it clears 50% of the global interest rate swap market.

Understanding Clearing Houses

A clearing house sits in the middle of a transaction and essentially acts as the “buyer to every seller and the seller to every buyer.” It assumes the counterparty risk when two parties make a trade. If one party defaults on its obligations, the clearing house steps in to settle the trade.

The key roles performed by a clearing house include:

  • Novation: The original contract between the two parties is replaced by two new contracts – one between the clearing house and the buyer, and one between the clearing house and the seller. This isolates the original parties from counterparty risk.
  • Netting: The clearing house nets offsetting positions to determine net exposures across all market participants. This increases capital efficiency for members.
  • Settlement: It settles cash and securities based on the netted positions and manages collateral across the ecosystem.
  • Risk management: Robust margining processes and default procedures are implemented to mitigate risks. Members contribute to a default fund as an added layer of protection.

Clearing houses bring numerous benefits including increased transparency, reduced counterparty risks, operational efficiencies and stability to the broader market. However, they also concentrate risks which requires vigilant risk management and regulation.

Key Service Offerings of LCH

LCH provides clearing services across a wide spectrum of asset classes through its different divisions:

LCH ForexClear

ForexClear is the leading clearing house for the foreign exchange market clearing over 50% of the global FX forwards and swap volumes. It currently settles and clears trades across 15 major currencies.

Members benefit from margin efficiencies, reduction in settlement risks and compression services. LCH ForexClear also offers portfolio margining with listed rates products. It is fully compliant with the FX Global Code of Conduct and supports the FX market’s transition to central clearing.

LCH SwapClear

As the first clearing house to launch cleared OTC interest rate swaps in 1999, SwapClear enjoys a dominant market share of 50% in the global market for cleared interest rate derivatives. It clears trades in all major currencies like USD, EUR, GBP, JPY etc.

SwapClear uses a unique service called COMPRESSION to eliminate redundant derivatives contracts from members’ books while preserving overall economic positions. This frees up capital and improves margin efficiency.


CDSClear provides central counterparty clearing for credit default swaps across European and US underliers. It launched in 2009 following the global financial crisis which saw the rise of systemic risks from bilaterally cleared CDS contracts.

CDSClear compresses portfolios through tear-ups to reduce gross notional amounts outstanding. It also offers cross-margining with other LCH products to optimize margin efficiencies for members.

LCH EquityClear

EquityClear provides clearing services across 15 major global equity markets including Australia, Canada, Germany, Hong Kong, Italy, Japan, Singapore etc. It leverages collateral and margin optimization across cash equities, equity derivatives and fixed income products.

EquityClear uses a unique Liquidity Efficiency Program which allows members to efficiently manage their end-of-day cash while optimizing investments. Members also benefit from cross-margining across LCH’s listed derivatives and fixed income offerings.

LCH RepoClear

RepoClear provides clearing for repo transactions across government bonds, corporate bonds and equities. It currently clears €250 billion daily across European government bonds and GBP 160 billion across UK government bonds.

RepoClear reduces counterparty risk through netting and cross-margining. It also optimizes funding costs through competitive pricing and the Liquidity Efficiency Program.

LCH EnClear

EnClear provides clearing for both physically and financially settled oil, coal, natural gas, power and emissions contracts. It leverages LCH’s strengths in risk management, collateral efficiencies and processing solutions.

Participants benefit from greater access to contracts through an open clearing model. EnClear also drives significant cost savings through portfolio margining, cross-margining, tear-ups and other compression services.


LCH SA is LCH’s Paris-based clearing house that provides clearing across Euronext markets and fixed income products. It acts as the central counterparty for transactions on the Paris stock exchange and other European markets.

The key offerings include derivatives and cash equities, fixed income products like repos and buy/sellbacks as well as commodities. LCH SA aims to optimize capital, liquidity and operational efficiencies for members.

Membership at LCH

LCH has an extensive membership base across the globe, numbering over 200 members. To be eligible for membership, applicants must meet certain financial standards, operational capabilities, risk management frameworks and technical connectivity requirements. LCH offers different membership categories:

  • Clearing Member: Can directly clear their own trades as well as client trades.
  • Basic Clearing Member: Can only clear their proprietary trades.
  • FCM Clearing Member: Can clear trades for clients but not themselves.
  • Non-Clearing Member: Accesses LCH through a Clearing Member.

Members must contribute to the default fund and meet margin requirements. They benefit from efficiencies like cross-margining and portfolio margining as well as risk mutualization. LCH aims to provide open access to derivatives markets while ensuring financial stability.

Risk Management at LCH

With central clearing, LCH sits in the middle of billions of transactions, assuming counterparty risk. Effective risk management capabilities are therefore critical. LCH utilizes a multi-layered risk framework:

Margin Requirements

LCH collects initial margin and variation margin from members to cover potential costs in case a member defaults. Both buildup and tear-up scenarios are considered.

Default Fund Contributions

All members provide default fund contributions to mutualize risks. The size depends on the risk posed by the member’s portfolio.

Collateral Management

Only assets meeting strict criteria are accepted as collateral. Conservative haircuts and concentration limits manage collateral risks.

Compatibility Testing

Members are regularly tested to ensure compliance with operational, technical and functional requirements.

Default Management

LCH has detailed procedures to handle member defaults and losses. This includes hedging, auctioning portfolios and loss allocation.

By spreading risks across members, LCH ensures that no single member’s failure jeopardizes the entire ecosystem. It maintains headroom to handle extreme but plausible market shocks, regularly evaluating risks through stress testing.

The Role of Central Counterparties Post-2008 Crisis

The 2008 financial crisis exposed the systemic risks that had built up from the web of bilateral OTC derivatives contracts between financial institutions. Clearing houses like LCH emerged as a key solution to address these risks.

By novating original bilateral trades, central counterparties insulate members from direct counterparty exposures. They aggregate risks to gain a portfolio view and mutualize these risks. Strict membership criteria, margining, collateral and default fund requirements enhance safety and stability.

In 2009, the G20 Leaders mandated central clearing for standardized OTC derivatives. This was incorporated into laws like EMIR in Europe and Dodd-Frank Act in the US which mandated central clearing. Consequently, the volume of cleared derivatives has risen substantially post-2008. LCH contributed significantly through its offerings like ForexClear, CDSClear and SwapClear.

Central counterparties concentrate risks which requires robust risk management capabilities and regulatory oversight. LCH has continued to evolve its risk frameworks and governance to align with global policymaker expectations. It provides the transparency, risk mitigation and operational efficiencies needed to foster resilient derivatives markets.

The Economics of Central Clearing

While clearing houses improve systemic stability, they also impact the economics for participants:

Collateral costs – Members must post collateral to meet margin requirements. This ties up capital that could have been deployed elsewhere.

Default fund contributions – Members pay to participate in the mutualized default fund. This cost scales based on the riskiness of their activity.

Fees – Clearing fees must be paid per contract cleared. There are typically volume discounts.

Margin efficiencies – Cross-margining across products and portfolio margining reduces overall margin requirements.

Compression services – Tear-ups and netting services lower capital needs by reducing gross notionals.

Counterparty credit risk mitigation – Elimination of bilateral counterparty risk saves on capital and funding costs.

Operational efficiencies – Smoother post-trade workflows and settlements due to centralization.

While clearing increases costs through margin and fees, the reduction in credit risks and operational overheads usually outweighs this. The resulting stability and transparency brings broader benefits for the financial system.


Clearing houses have become indispensable market infrastructure delivering significant systemic and economic benefits. LCH has cemented its position as a leading global clearing provider through its diverse product offerings, risk management capabilities and long-standing reputation.

By mutualizing risks across participants, LCH provides stability and resilience. At the same time, it brings member efficiencies through innovations like portfolio margining, cross-margining, compression and netting services. While central clearing re-shapes derivatives economics for members, the transparency and risk reduction usually make it worthwhile.

As derivatives markets continue to evolve, LCH is strengthening its clearing solutions across new instruments, currencies and regions to support the changing needs of market participants. Robust risk frameworks and operational reliability will ensure LCH maintains its central role in the coming decades as a key pillar underpinning financial stability.