Warrants as collateral FAQs

LME Clear allows Members to utilise certain LME warrants as acceptable collateral on a metal for metal basis i.e. aluminium warrants are allowed to cover Margin Requirements arising from 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, LME Clear regularly seeks opportunities to enhance its post-trade service offering.

Yes. There are no restrictions on using eligible warrants to cover the Margin Requirements in either House or Client accounts, provided the warrants are owned outright by the pledging Member.

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 stored in LME-approved warehouses that may otherwise not be utilised to its full potential. Using warrants to cover Margin Requirements may free up other types of collateral for Members to use for other parts of their business, giving them more optionality and flexibility and may allow Members to optimise assets on their balance sheet in a more cost and capital effective manner. In some circumstances, using LME Warrants as Collateral creates a natural hedge versus cleared positions.

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 as settled 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 become enforceable when the Member defaults or becomes insolvent as per the terms of the relevant LME Clear Rules and contractual arrangements.

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 Each individual Warrant ID can then be withdrawn as required.

The deadline for pledging warrants is 12.30 London time. Eligible warrants will be given value as part of the next cover distribution process. Any ineligible warrants collected will be returned to the member. (see Clearing Procedure D 4.15 (Placement)), LME Clear Rulebook)

The deadline for withdraws is 09.00 London time.

Yes, as long as the withdraw instruction has been entered prior to the cut-off time of 09.00 (see Clearing Procedure D, 4.16 (Withdrawal)  LME Clear Rulebook) . 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.

Yes. All transfers are completed on the same Business Day, provided that the Warrants are Eligible LME Warrants and the instructions are received within the cut-off times mentioned above.

Using LME Warrants as Collateral could 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 and any other collateral limits) before a margin call would be issued.

No. Where a Member has insufficient collateral to cover their Margin Requirement, the normal cover calling processes for Cash Collateral will be followed.

Yes. Concentration margin will be calculated on existing cleared positions after consolidating with any collateral positions on a metal for metal basis. In certain circumstances this can provide efficiencies regarding additional margin calculations.

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

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

Where any form of collateral ceases to be eligible the member must provide replacement collateral to the required value immediately, as reflected in Clearing Procedure D, 3.4. This could include specific warrants being given zero cover valuation with short notice in certain circumstances.

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.

Members are charged accommodation fees on the utilised balances of Warrants as Collateral only. There is also a transaction fee for moving warrants to LME Clear on an Ex-Clear basis. For up to date fee information please see our Group Fees and Charges document (PDF).

There is no accommodation charge for LME 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 LME 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 Warrants with unpaid rent will not be accepted to be pledged as Collateral where rent falls due within the next 5 days. Any LME Warrants already pledged as Collateral will have Collateral Value removed should rent remain unpaid 3 days prior to rent due date.

Where LME Clear identifies appropriate demand, it will always seek to enhance its collateral service. In this regard LME Clear plans to analyse the existing service in order to identify enhancements beneficial to its Members within our legal, risk and operational standards.

For more information about warrants as collateral, please contact the relationship management team

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