Note — this is not the margin call many were looking out for.
As we’ve explained, LCH Clearnet SA follows a different framework to LCH Clearnet Ltd — operator of the RepoClear service which applies the famous 450bps spread “trigger” for sovereign risk margin.
LCH Clearnet SA is still closely involved in the Italian bond market. Therefore its raising of initial margin by between 3 and 5.5 per cent percentage points (sorry for earlier error!) across Italian bond maturities matters. Here’s the full release:
(Click for full document)
And here’s the margining methodology used for this margin call.
Update — The margin changes will also affect positions where Italian bonds are traded with Spanish or French bonds, i.e. spread trades. A bit more on how the margin increases work…
Initial margins, or the extra amount traders have to stump up on a daily basis to back their positions, “evaluate the potential loss under the hypothesis of portfolio liquidation” according to the methodology.
Here’s what initial margin (again, in terms of percentage points) was like the last time LCH Clearnet SA reviewed Italian bonds in October:
Here’s what initial margin will look like now:
There’s also variation margin, i.e. deposits held against intra-day volatility in the bonds. Which is… a factor at pixel time. Ten-year Italian bond yields were within a whisker of 7 per cent — having started the day closer to 6.7 per cent.
Update (1000 UK time) — Meanwhile, in terms of the LCH Clearnet Ltd margin framework… we aren’t far off the 450bps “trigger” actually. The current spread of the Italian 10-year benchmark bond yield to the AAA benchmark index that LCH reference is 443bps at pixel time. Bloomberg code for the index is C96010Y.
To sum up — Italian bonds are in a (sorry to use the cliche) perfect storm at the moment. Real money investors are running away and those investors using Italian bonds to finance will also be clearing the decks now.
LCH.Clearnet lifts margin on Italian debt – FT
Italian settlement fail penalty, bond sell-off — causation or correlation? – FT Alphaville