Once this number passes 100%, one will need to deposit more cash than bond par notional to short the cash product. With CDS trader stigmatizing no longer working, the criminal cartel continues to target cash players. It is interesting that some market prices on bonds are below the actual cash requirement threshold (80%). In essence LCH just set a fake recovery rate on PIIGS cash bonds at 80 cents on the dollar.
Dear RepoClear Member,
accordance with the Sovereign Credit Risk Framework and in response to
the yield differential of 10 year Portuguese government debt and 10 year
Irish government debt against a AAA benchmark, LCH.Clearnet Ltd has
revised the risk parameters for Portuguese and Irish government bonds
cleared through the RepoClear service. The additional margin required
for positions of Portuguese government bonds will consequently be
increased from 65% to 80% for long positions. The additional margin
required for positions of Irish government bonds will be increased from
75% to 80% for long positions. These amounts will be adjusted for the
current bond price*. Short positions will pay a proportionately lower
This decision is based solely on
publicly available yield spread data and in no way represents a forward
looking market view. LCH.Clearnet will continue to monitor yield spreads
closely and keep the parameters under close review in accordance with
the Sovereign Credit Risk Framework.
1. The additional margin will be reflected in a margin call on Wednesday 29 June April 2011.
Executive Director and Head of Risk Management
* The impact of bond price can be material. For example, an 80%
multiplier applied to a trade with a current price of 70 would equate to
approximately 50% of nominal value.
Note some of the issues that are trading below 80: