International market tensions were triggered today by the decision of one of the largest clearing houses in the world, LCH Clearnet. Few people outside the financial system have heard of this house, but the fact that this institution, formerly known as the London Clearing House and Clearnet, suddenly demanded a guarantee return almost double for Italian bonds with maturities between 7 and 10 years to 11.65% from 6.65% scared all holders of Italian bonds. What does this house anyway? And why is it so important?
LCH Clearnet mediates approximately 50% of the interest rates swap market, estimated at 348,000 billion dollars, and is the second largest clearing house of bonds and repurchase agreements in the world. The amount of 348,000 billion dollars is five times the world GDP. The company is present on 13 financial markets and intermediates goods transactions, securities, derivatives, credit default swaps and energy.
LCH Clearing House performs a necessary operation for the more efficient execution of buy and sell orders. Clearing is a system of paying without cash which consists of compensation of mutual claims and liabilities. In the case of forward contracts, such as those dealing with the Italian bonds with a maturity of 10 years, they are marked to market daily by the clearing house, which closes daily the stock investor position, depending on the stock market rate developments.
Thus, potential buyers no longer have to wait placing an order for sale on the market by a trader that already owns the instrument, but buying directly from the intermediary. Similarly, potential sellers can quickly liquidate positions held, without waiting for a buyer for the order to be executed.