The London Metal Exchange is benefitting from launching its own clearing house last year as it has introduced compression services and given members the ability to post warrants as collateral for the first time.
LME Clear launched in September last year to meet the Emir regulations covering clearing in Europe and give the firm the flexibility to launch new products and expand in Asia, a key focus for parent Hong Kong Exchanges and Clearing Limited.
Adrian Farnham, chief operating officer of LME Clear, told Markets Media: “In the first year of operation LME Clear has achieved five big things which make sense for the market – we started accepting RMB as collateral; supported the launch of new LME ferrous and premium contracts; introduced compression and the ability to post warrants as collateral.”
Farnham will become chief executive of LME Clear in January 2016. He is slated to take over from Trevor Spanner who is relocating from London to Hong Kong at the beginning of next year to become chief operating officer of HKEx and head the new platform development division.
LME Clear launched a trade compression service on November 23. Compression allows members to tear up certain offsetting trades without altering the risk profile of their portfolio. Members benefit from operational efficiencies by reducing the number of trades and from using capital more efficiently. A reduction in notional value means that banks can hold less capital against their outstanding positions under the Basel III requirements.
Farnham said: “The first few compressions have reduced outstanding notional amounts by about 95%. Clients also receive operational benefits through reducing hundreds of thousands of open trades to a few hundred.”
LME Clear charges a fee for the compression service which is optional for members. They can also choose whether to compress all the trades in their portfolio on a regular basis or just trades for certain clients.
Members select two or more gross positions linked to the same account to be compressed into a smaller number of positions or to create a zero position. A new trade date is created using the date of compression and an algorithm calculates the new price so that variation margin on the original positions does not change.
“A number of bigger clients have said they intend to use the compression service and are in testing or in discussions with their software vendors,” added Farnham.
On 30 November LME Clear said it had become the first clearing house to accept warrants as collateral.
Farnham said: “The ability to use warrants as collateral makes metals trading more efficient and is something the metals industry has wanted for more than 10 years.”
An LME warrant is a document of possession issued by warehouses for metal held on the owner’s behalf.
“Warrants are a significant new source of collateral for the industry, and will add billions of dollars to the pool that can be used for margins,” Farnham added.
In the results for the nine months ended 30 September 2015, Hong Kong Exchanges and Clearing Limited said revenues had exceeded $10bn for the first time in a financial year due to a significant increase in market activity on the cash and derivatives markets in Hong Kong and nine months of income from LME Clear following its launch in September 2014.
Featured image by Kreepin Deth/Wikimedia Commons under creative commons
