Article: SwapClear T4 and T2 models

15 February 2012 | Bill Hodgson

For some reason there are people out there who keep googling T2 and T4 and hitting my blog. To satisfy their curiosity, here's what there is to know.

T2 model

The T2 model is now the only way trades are booked in SwapClear. This means a client trade is booked into a client account, facing LCH, and the counterparty trade is booked into their house account, like this: Client <-> Clearing Broker <-> LCH (in the client account) Counterparty <-> LCH (in their house account) So end result is: Client <-> CB <-> LCH <-> Counterparty You can see there's two swaps (sides) with LCH in the middle, so this is the Trade x 2 model, or T2. (The trade from Client to CB is outside clearing and subject to a normal ISDA and CSA).

T4 model

The T4 model is no longer used, it was an invention to serve a purpose and for completeness looked like this: Client -> Clearing Broker -> LCH (Client account) Clearing Broker <- LCH (House account) Clearing Broker -> LCH (House account) LCH -> Counterparty (House account) The reason for the design was to insulate the counterparty from a client defaulting, or wanting to tear-up the trade. It was complex, and given the new netting function in SwapClear was made redundant.    


Thanks. Would you have a view on why this change was made, to T2 and what are the benefits apart from it being simpler and needs lesser trades overall. Is this to make it similar to the FCM model?

Simpler and easier to implement FCM, I think you already said it. Bill

Well yes, the T2 model is much simpler though. I have training materials which explain the client clearing models in the US & EU which make it much clearer.

So is this still called the Principal model of client clearing?