Warrants as collateral FAQs | London Metal Exchange

As part of its collateral service, members are able to pledge LME Warrants as collateral against their margin requirements. This is a unique offering from LME Clear - the clearing house purpose-built for the metals market

Members wishing to post non-cash collateral including warrants are required to sign additional documentation. Certain formalities (including registration of security interests) may apply before non-cash collateral is accepted and this may vary from jurisdiction to jurisdiction. LME Clear will only accept non-cash collateral from Members where it is satisfied that the arrangements are enforceable without delay in the event of a member default. Members should note there may be a lead time to posting warrants while this is being assessed. Please see here for full details.

Overview

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.

LMEmercury and LMEsword

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.

Margin requirements

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.

Fees,haircuts and warehouse rents

Currently, LME Clear charges 25 bps annual accommodation fee on the total amount of warrants encumbered. A $4.00 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.

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Overview

LMEmercury and LMEsword

Margin requirements

Fees,haircuts and warehouse rents