LME Launches Own Clearing House

Terry Flanagan

The London Metal Exchange met its deadline for launching its own clearing house which has been designed to meet new regulations in Europe and give it flexibility to launch new products and expand in Asia.

LME Clear transferred all the positions of LME members from previous clearer LCH.Clearnet to its own risk and clearing system, LMEmercury, on 22 September.

Trevor Spanner, chief executive of LME Clear, told Markets Media: “Emir drove the whole design of the new platform as a clearing house has to demonstrate how they comply with the new standards in order to receive authorisation. We had an advantage as we did not have a legacy system while other CCPs have had to change the wheels on the bus while they are driving.”

On 3 September the European Securities and Markets Authority authorised LME Clear as a registered central clearer under the European Markets Infrastructure Regulation. Emir requires CCPs based in the European Union to be registered and for CCPs from other jurisdictions to be recognised in the European Union.

The board of the LME approved building its own clearing house in December 2011, with self clearing to begin in 2014. The deadline of 22 September was set more than a year ago.

The timetable had to be adjusted to meet the bidding battle for the LME, which resulted in the UK company being acquired by Hong Kong Exchanges and Clearing Limited in 2012, and to accommodate the release of Emir technical standards in the same year.

“In a Big Bang we transferred two million LME positions in two hours and nine minutes. We planned the migration in details and had done many dress rehearsals,” added Spanner.

In the week beginning 15 September LME formed the default fund for its clearing house and members pre-funded collateral for their positions.

On Friday 19 September the LME took the formal decision to transfer members’ positions. The exchange’s staff arrived at 6am on Saturday 20 and reports were sent out to members at 8pm the same day, without having to use the contingency day on Sunday. On Monday 22 members paid any additional margin requirements before the clearer went live.

Trevor Spanner, LME Clear

Trevor Spanner, LME Clear

Charles Li, chief executive of HKEx, said in a statement: “Building LME Clear was an important strategic decision because it not only provides the LME immediate and substantial revenues, but also gives the LME and the Group the ability to pursue new markets, new products and new capabilities, particularly in extending the LME franchise to Asian time zones and in adding RMB capabilities.”

Spanner said the exchange hopes to add renminbi capabilities in November, subject to regulatory approval from the Bank of England. He added that the LME has said it plans to expand beyond metals and would like to accept non-cash collateral such as LME warrants.

LME Clear will initially clear all trades on the LME but could potentially offer clearing services to third party clients and Spanner said a number of companies had been in contact. The platform offers members real-time risk assessments and straight-through processing of collateral with full integration with treasury functions.

“Clients had asked for better business control and we have improved the process for expiry,” added Spanner. “They can also see their positions accurately in real-time, the impact on their risk and whether they need to pay more margin.”

Swedish supplier Cinnober Financial Technology provided the core technology for real-time multi-asset clearing and risk management to the LME.

Cinnober had already provided a number of systems to the LME including the electronic trading platform LMEselect. LME appointed Cinnober to develop clearing in 2012, and the technology provider partnered with Swedish quantitative financial technology firm Algorithmica Research.

Veronica Augustsson, chief executive of Cinnober, said in a statement: “What is emerging is a paradigm shift: in the future the financial industry will look back on this period and talk about before and after real-time clearing.”

Augustsson said Brazil’s BM&FBovespa exchange has also gone live with Cinnober’s clearing platform and the Johannesburg Stock Exchange has begun an implementation project.

Featured image by Kreepin Deth/Wikimedia Commons under creative commons

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