How Central Clearing Submission Works

Since the G20 Pittsburgh commitments in 2009 — made in the wake of the 2008 financial crisis — mandatory central clearing has become the norm for standardised OTC derivatives. In Europe, EMIR mandates clearing for vanilla interest rate derivatives and credit default swaps. In the United States, the Dodd-Frank Act imposes similar requirements. The result is that the vast majority of new interest rate swap volume now flows through a central counterparty (CCP) — primarily LCH SwapClear for rates and CME Clearing.

But clearing does not happen automatically at the moment a trade is executed. It is a distinct operational process that involves multiple parties and several steps, each of which can fail. Understanding this process is essential for anyone working in derivatives operations, risk, or technology.

Not every market participant can clear directly with a CCP. CCPs require their members — known as clearing members or general clearing members (GCMs) — to meet stringent financial and operational requirements, including substantial minimum capital and the ability to meet large margin calls on short notice. Only the largest banks qualify as clearing members of a CCP like LCH or CME.

Other market participants — pension funds, asset managers, corporates, smaller banks — access CCP clearing indirectly through a clearing member, which acts as their clearing broker. The clearing member stands between the client and the CCP: it takes on the legal obligation to the CCP on the client's behalf, while simultaneously facing the client in the opposite direction.

This creates a layered structure:

• Client trades with Dealer Bank A → the bilateral execution
• Dealer Bank A submits the trade to LCH → as a clearing member, either for its own account or on behalf of its client
• LCH novates the trade → Dealer Bank A now faces LCH; LCH faces Dealer Bank A on the other side

A give-up occurs when a client executes a trade with one bank but clears it through another bank's clearing membership. This is common when a client has a prime brokerage or clearing relationship with a specific bank (their "clearing broker") but executes trades with multiple different execution banks.

The process works as follows: Client executes a £100m five-year IRS with Execution Bank X. Client instructs Execution Bank X to "give up" the trade to Clearing Broker Y — meaning the trade is transferred from Execution Bank X's books to Clearing Broker Y's books. Clearing Broker Y then submits the trade to LCH as the clearing member. LCH accepts the trade, and the novated trade sits in the Client's account at Clearing Broker Y.

Give-ups require pre-established give-up agreements between execution banks and clearing brokers. These specify the terms under which trades can be given up, the fees involved, and the liability framework. Without a give-up agreement in place, the execution bank cannot give up the trade to the intended clearing broker, and the trade may remain bilateral or need to be handled differently.

For a standard GBP interest rate swap submitted directly by a clearing member for its own account, the submission process at LCH SwapClear typically works as follows:

Step 1: Trade confirmation on MarkitWire. The trade is confirmed electronically on MarkitWire. Both counterparties submit their version of the trade; MarkitWire matches the terms and produces a matched confirmation.

Step 2: Clearing submission. MarkitWire automatically transmits the matched trade to LCH SwapClear via the LCH API. Both clearing members' submission systems send simultaneous clearing requests to LCH, confirming that both sides consent to the trade being cleared.

Step 3: LCH eligibility check. LCH checks whether the trade meets its eligibility criteria: is it a product type that LCH accepts? Does it fall within the tenor range? Are the payment conventions standard? Does the currency match an accepted currency for the SwapClear service? If any criterion is not met, LCH rejects the submission.

Step 4: Credit limit check. LCH checks whether accepting the trade would breach any credit limit for either clearing member. LCH sets aggregate position limits for each clearing member; a submission that would cause a member to exceed its limit may be rejected.

Step 5: Acceptance and novation. If all checks pass, LCH accepts the trade. The novation occurs simultaneously: the bilateral trade between Counterparty A and Counterparty B is legally replaced by two new trades — one between Counterparty A's clearing member and LCH, and one between LCH and Counterparty B's clearing member. The original bilateral trade ceases to exist.

Step 6: Margin calculation trigger. Acceptance of the trade immediately triggers LCH's margin calculation engine. LCH computes how the new trade affects the clearing member's existing portfolio and determines any additional initial margin required. A margin call may be issued the following morning, or intraday if LCH runs an intraday margin call.

A clearing submission can be rejected by the CCP for several reasons, and each requires specific remediation:

• Product not eligible: the trade structure or tenor does not meet LCH's eligibility criteria. The trade must remain bilateral under the counterparty's CSA — but if mandatory clearing applies, this may be a regulatory breach. The trade may need to be restructured.
• Matching failure: the two submissions from the two clearing members contain different economic terms. This indicates a confirmation break — the two parties have different versions of the trade. The bilateral confirmation must be resolved before resubmission.
• Credit limit exceeded: the submission would push the clearing member beyond its aggregate position limit at LCH. The clearing member must either reduce its existing portfolio or obtain an increased limit — typically a time-consuming process.
• Technical failure: a connectivity issue between the bank's systems and LCH's API. The trade cannot be submitted until the connectivity issue is resolved, potentially missing the same-day clearing window.

A failed clearing submission creates an operational problem. If the trade is subject to mandatory clearing, allowing it to remain bilateral creates a regulatory breach under EMIR or Dodd-Frank. The operations team must escalate immediately, work to resolve the rejection reason, and resubmit within the required timeframe.

LCH SwapClear processes clearing submissions in real time during the trading day. For a trade executed in the morning, the clearing submission, acceptance, and novation can be completed within minutes. LCH provides a "cleared" status confirmation back to both clearing members, and the trade appears in their LCH portfolio immediately.

The daily margin cycle begins after the market close. LCH runs its end-of-day pricing, computes the portfolio-level P&L, and calculates variation margin (VM) and initial margin (IM) for each clearing member. VM calls are settled the following morning — typically by 10am London time for the London margin call. This tight timeline requires clearing members to have collateral management processes that can mobilise cash or eligible securities very quickly after the margin call is received.