LME Clear has a robust risk management framework that provides the structure for clear risk policies, processes and internal control mechanisms to manage, assess and contain the risks posed to the clearing house.
Additionally, the LME Clear governance structure conforms to the ESMA Regulatory Technical Standards. Initial margin is calculated using SPAN.*
*"SPAN" is a registered trademark of Chicago Mercantile Exchange Inc., used here under licence. Chicago Mercantile Exchange Inc. assumes no liability in connection with the use of SPAN by any person or entity.
Risk methodologies
Mark to market for LME products is calculated using the following risk methodologies:
| Product | VM methodology |
|---|---|
| LME Traded Forwards | Discounted Contingent Variation Margin (DCVM) |
| LME Traded Average Price Futures | Discounted Contingent Variation Margin (DCVM) |
| LME Traded Futures (Index & Minis) | Realised Variation Margin (RVM) |
| LME Ferrous Futures | Realised Variation Margin - (RVM) |
| LME Traded American Options | Liquidation Value (NLV) |
| LME Traded Average Price Options (TAPOs) | Net Liquidation Value (NLV) |
Margin calculations (PDF) are based on a two day liquidation period and a 99% confidence interval.
Margin versus collateral is monitored on a real time basis. Whilst LME Clear must reserve the right to call members for additional collateral at any time that it deems necessary, it will adopt a tolerance based methodology for making intra-day margin calls. Thresholds will be set to determine when additional collateral needs to be provided. These thresholds may vary dependent on the credit rating of the member. This approach will assist members in their treasury management functions.
LME Clear will receive closing/settlement prices from the LME and will be taking a snapshot of Reuters foreign exchange and interest rates data to complete the set of end of day prices. For more detailed information on the margin methodology and calculations please download the detailed service specification.
Compression service
LME Clear has designed a unilateral risk free post trade compression service for forward and swap contracts. Compression results in the termination of the old contracts and creation of a new contract(s). The service is optional for members.
Compression through LME Clear enables clearing members to compress house and client contracts and reduce the overall notional value and number of line items without changing the overall risk profile of the compressed trades. Compression allows members and clients to combine or offset trades with compatible economic characteristics, resulting in a reduction in notional outstanding.
Simplified portfolio management is achieved by allowing members and clients to reduce the number of individual positions in the portfolio, while maintaining the same risk profile. This requires fewer reconciliations, delivers more efficient portfolio transfers and, in some cases, may enable financial institutions to lower their capital requirements under Basel III.
We have produced an LME Clear Compression Service Description (PDF).
Please note the proposed changes only effect those that plan to use the new optional service. Current rules and procedures are otherwise not impacted. For those that use the service, additional rules will be added to the Rulebook in due course.
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Credit risk management
Default management
Margin information
Margin parameter files
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