LSOC provides for client asset protection in the light of the Dodd-Frank-Act
Following the Dodd-Frank-Act Wall Street Reform and Consumer Protection Act, the CFTC introduced a new mandatory segregation concept with regards to swap clearing in the US. This concept is called LSOC and stands for "Legally Segregated, Operationally Commingled" and is addressed in Part 22 of the CFTC Rules
The primary objective of LSOC is to minimize the FCM Client's "fellow customer risk" i.e. the risk that an FCM Client of an FCM Clearing Member could sustain losses in case of a default or insolvency of the FCM Clearing Member or other FCM Clients of such an FCM Clearing Member. Such rules require that a DCO is restricted from utilizing the value of margin assets allocated to one FCM Client to meet the obligations arising from Own Transactions of the FCM Clearing Member and from FCM Client Transactions of another FCM Client.
The disclosure document sets out the information required to be disclosed under Article 39(7) EMIR. It provides a summary description of the LSOC model currently offered by Eurex Clearing, including information on the main legal implications of the respective levels of segregation and applicable insolvency law.
Singapore addendum to disclosure document pursuant to Article 39 (7) EMIR
FCM CMs can support one or two variants of LSOC
LSOC Without Excess
Eurex Clearing is offering a LSOC Without Excess model as of 19 August 2019. LSOC Without Excess offers the full protection of an LSOC model, but does not allowed to post any excess margin for a specific FCM Clearing Member on a day-to-day basis. The Value of FCM Clearing Member collateral is equal to a customer's (Initial) Margin Requirement in accordance with CFTC Rule 22.15. FCM Clearing Members using the LSOC Without Excess are not required to send a Collateral Value Report (CVR).
LSOC With Excess
In case the FCM CM wants to provide excess collateral for one or more of its FCM Clients, the FCM CM is required by the CFTC Part 22 to report to Eurex Clearing the value of collateral assigned to each FCM Client. "LSOC With Excess" can be elected on collateral pool level, i.e. in relation to each LSOC collateral pool the FCM CM can choose whether they opt for the "LSOC With Excess". Under "LSOC With Excess" the Legally Segregated Values (LSVs) and the FCM Buffer are provided by the FCM CM using a so called Collateral Value Report (CVR). LSOC With Excess is offered as of fall 2018.