The Default Fund is sized according to EMIR requirements and recalculated monthly based on the previous six months data. Member contributions are based on relative initial margins subject to a minimum contribution. Members Default Fund contribution is covered in cash (USD) and invested by LME Clear in line with the Regulatory Standards on Liquidity and Investment Risk.
The LME Clear Board delegates overall responsibility to the LME Clear Default Management Committee for the default management process and all related strategic decision making involved in the risk reduction/neutralisation strategy and the subsequent auction employed by LME Clear. A high level Default Management presentation can be found here.
LME Clear default management procedures govern the processes that apply to Members in the case of a Clearing Member default; Clearing Members remain responsible for the credit risk of their clients. These procedures facilitate transparent and practical market action in stress situations.
LME Clear has procedures in place, both internally and with all Members regarding the processes to manage a default. A detailed description is available in Default Management Process.
The stringent membership admission requirements to LME Clear are the first line of defence, guaranteeing that all clearing members meet basic conditions and have the necessary resources and knowledge. A clearing member must successfully complete simulated default tests to demonstrate they have the appropriate expertise and operational processes in place prior to beginning clearing operations. Once live, all clearing members are required to participate in fire drills regularly to confirm their operational readiness to manage a member default.
In broad terms LME Clear will look to neutralise risk by hedging the overall House position of a defaulting member against the most liquid market dates and roll forward any prompt physical delivery positions to manage its risk. LME Clear will then seek to auction the defaulting member’s remaining house portfolio to other participants as its preferred method of disposal; however it will also be able to execute the close out of all remaining open house positions if required.
See the link below to explain the protections and actions for clients in the event of a Member Default.
Client Accounts and Default Management
For further information please refer to LME Clear Rules and Procedures.
The porting request process can be initiated on receipt to LME Clear in the form of a Porting Request Notice, submitted by all Clients allocated to the Client Account. Please note a copy of the default client porting spreadsheet can be downloaded from the link here.
LME Clear is required to publish certain additional information to its member firms to enable them to calculate their potential Non Default losses to LME Clear.
This is available to Members and updated monthly.