Risk management

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. The 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 license. 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)
LMEprecious Futures Realised Variation Margin - (RVM)
                       

Margin calculations are based on a two day liquidation period for both Exchange trades and OTC products 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.