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LCH.Clearnet, the LME's contracted central counterparty clearing house, clears LME contracts throughout the London business day.
Briefly, clearing works as follows: one LCH.Clearnet clearing member contracts with another clearing member to buy metal or plastic. Both sides of the trade are fed into the computerised matching system, which feeds the information to LCH.Clearnet. Assuming both parties' entries agree on such details as time of trade, price, prompt date, contracting parties and volume, the trade is accepted as matched. The single buy/sell contract is novated by LCH.Clearnet into two separate buy or sell contracts between itself and each of the clearing members respectively, enabling it to take responsibility for contract performance.
LCH.Clearnet is owned 45.1% by exchanges (Euronext, LME and ICE Futures), 45.1% by clearing members, and 9.8% by Euroclear. Its primary risk capital is provided by a cash paid Default Fund, which currently stands at a little under £600 million. Clearing members thus are protected from the risk of business failure by other clearing members for that portion of their mutual business that is cleared.
Non-clearing members' and clients' contracts with clearing members are not affected by clearing; they remain principals' contracts.
LCH.Clearnet is taking on market risk when it accepts trades into clearing, and it covers that risk by requiring payment of margin - amounts that cover the extent of any losses a contract might show. LCH.Clearnet looks at all the positions of a clearing member when calling margins, since a clearing member may have some positions in profit and others in a loss situation, and calls margin on the basis of the clearing member's net position. Margins may be provided in cash or by other collateral such as bank guarantees.
For full details of the LME margin requirements, please visit LCH.Clearnet's website at http://www.lchclearnet.com/risk_management/ltd/margin_rate_circulars/lme/default.asp
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