Warrants as collateral FAQs

LME Clear allows clearing members to utilise certain LME warrants as acceptable collateral on a metal for metal basis i.e. aluminium warrants would be used to cover aluminium positions.

Warrants that can currently be used to cover margin requirements on a metal for metal basis:

• copper
• aluminium
• zinc
• nickel
• lead
• tin

.

Whilst there are no plans currently to add other metals, we are constantly working with the market and our regulators to enhance our post-trade service offering.

 

Yes. There is no restriction on using member owned warrants to cover either house or client accounts.

If a member wants to use warrants belonging to a client then these can be used to cover margin for the same client who holds positions at the clearing member in an individual segregated account (ISA). For more information on using client warrants, contact the LME (details at the end of this FAQ).

Benefits of using warrants as collateral will differ from member to member and client to client. By using LME warrants as collateral, this can help utilise metal sitting in LME-approved warehouses that may otherwise not be utilised to its full potential. Using warrants to cover margin requirements can free up other types of collateral for members to use for other parts of their business giving them more optionality and flexibility.

Using warrants as collateral may allow members to optimise assets on their balance sheet in a more cost effective manner. For clients, warrants as collateral is an alternative way to finance their margin requirements. For some, using warrants as collateral may also have a positive impact to their regulatory capital requirement.

Pledge and withdraw intentions are entered into LMEmercury by members (see timings below). The actual transfer of eligible warrants is completed by an ex-cleared transfer in LMEsword. Once the ex-cleared transfer has been received by LME Clear, the pledge/withdraw instructions will be updated in LMEmercury.

The underlying metal and, where relevant, the LME warrants and related rights are pledged or charged in favour of LME Clear. The security arrangements are enforceable where the member (and/or where a client or affiliate of the member has provided the LME warrants, the relevant client or affiliate) defaults or becomes insolvent as per the terms of the relevant LME Clear Rules and contractual arrangements.

Yes. The existing systems and processes currently in place allow for the transfer of client warrants.

Yes. The exact warrant ID numbers can be viewed in LMEmercury once the pledge has settled. Each individual warrant ID can then be withdrawn as required

Yes, as long as the withdraw instruction has been entered prior to the cut-off time of 09.00. Withdraws are processed shortly after the cut-off time, and the warrant will be ex-cleared to the member at around 09.30 London time.

The deadline for pledging warrants is 12.30 London time. Eligible warrants will be given value as part of the cover distribution process. Any ineligible warrants collected will be returned to the member.

The deadline for withdraws is 09.00 London time.

Yes. All transfers are completed the same business day, provided that the warrants are eligible and the instructions are received within the cut-off times mentioned above.

Whilst using warrants as collateral will not reduce the likelihood of a margin call, if an excess balance of warrants is held on a collateral account then this excess would be used (taking into account the metal for metal cover) before a margin call would be issued.

cover) before a margin call would be issued.

No. Where a member has insufficient collateral to cover their margin requirement, a USD cash margin call would be issued (or a GBP cash call on a USD holiday when LME Clear is open).

Yes. Concentration margin will be calculated on existing cleared positions after consolidating with any collateral positions on a metal for metal basis.

LME warrants can cover both initial and variation margin, but they are only acceptable on a metal for metal basis i.e. aluminium warrants would cover aluminium positions.

Both market liquidity and diversification limits apply. The limits can be found on the LME website by registering free under the “documents” tab on the acceptable collateral page.

Yes. Haircuts will be applied to the total value of the warrants used. The haircut amounts will be updated on a regular basis and can be found at our haircut methodology page.

Currently, LME Clear charges 25 bps annual accommodation fee on the total amount of warrants encumbered. A $7.90 per warrant ex-cleared transfer fee is also applied when transferring warrants from member to LME Clear (capped at $3,000 per year).

There is no charge for warrants pledged that are not being used as margin cover.

Members will still be required to pay rent directly to the warehouse agents. However, LME Clear will support members by endorsing warrants on their behalf in LMEsword when requested. This will ensure members do not need to withdraw the warrants and incur ex-cleared transfer costs prior to rent payment.

 

LME Clear requires all warrants held as collateral to have rent paid in full 3 business days before 31/3 (T) each year to ensure collateral cover. Any warrants held as collateral with rent payment outstanding in T-3 business days will not receive value and will need to be withdrawn in full by the member. New warrant pledges with outstanding rent payments due within T-5 business days will not be accepted as collateral.