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Originating department:Commercial Services
Company Circular No:LCH.Clearnet Ltd Circular No 2767
Service Circular No:LCH EnClear No 324
Date:20 January 2011
To:All LCH.Clearnet EnClear Clearing Members

Launch of OTC Clearing Service for API 2* and API 4* Coal Option Contracts

LCH.Clearnet is pleased to announce that it will extend its OTC Clearing service for API 2 cif ARA and API 4 fob Richards Bay (Argus/McCloskey) Coal swaps to cover option contracts traded against these two indices. The new cleared options contracts will be launched on Monday 7 February 2011.

These contracts will fall within the LCH EnClear OTC Clearing service.

Contracts will be cleared using the ECS system and will be exercisable into the underlying API 2 cif ARA and API 4 Richards Bay (Argus/McCloskey) Coal swap contracts.

Clearing of Coal option contracts is open to any member approved by the Clearing House to clear trades in the LCH EnClear OTC Clearing Service for Freight.

This circular sets out in more detail how the clearing service will operate and includes:

  1. Contract specifications
  2. Contract listing at launch
  3. Contract codes
  4. Clearing system used
  5. Clearing Member participation
  6. Margin methodology
  7. Clearing fees

1. Contract Specifications

API 2 cif ARA and API 4 Richards Bay (Argus/McCloskey) coal option contracts
DescriptionSingle expiry, cash settled, premium paid, option on the underlying API 2 cif ARA or API 4 Richards Bay (Argus McCloskey) Coal swap contract for the corresponding expiry.
Lot size1,000 tonnes per month.  A quarter contract will comprise 3,000 tonnes, a calendar contract will comprise 12,000 tonnes.
Minimum lot size5 lots per month.  A quarter contract will comprise 15 lots, a calendar contract will comprise 60 lots.
PricingUSD and per metric tonne
Minimum tick$0.01 per tonne
Option typeOptions are single expiry European style options and will be automatically exercised on the expiry day if they are “in the money” unless set to expire manually.  If an option is “out of the money” it will expire automatically unless exercised manually.  Manual exercise is only permitted on expiry day.
Option premiumThe Premium is paid at the time of purchase.
Last trading dayThe first working day of the month prior to commencement of the underlying Coal swap contract.eg a calendar or Q1 option contract will expire on the first working day of December.

17:00 hours UK time on the last trading day

Automatic exercise settings are pre-set to exercise contracts which are one minimum price fluctuation or greater "in-the-money" when compared to the relevant reference price.

Contracts are single expiry options.  A quarter contract will expire into the underlying monthly swap contracts that comprise the quarter on last trading day.  A calendar contract will expire into the underlying monthly swap contracts comprising January through December on last trading day.

Members are permitted to override automatic exercise settings or manually enter exercise instructions for this contract.

The reference price will be a price in USD and cents, equal to the final settlement price for the underlying API 2 Swap contract.

For these purposes “final settlement price” means the final settlement price on the expiry day of the underlying API 2 cif ARA or API 4 Richards Bay (Argus/McCloskey) swap contract.

Contract series3 to 6 quarter contracts and 3 whole calendar contracts.
All option contracts expire into the underlying months of the corresponding contract series.
Strike Price50 strike prices in increments of $1.00 above and below the “at-the-money” strike price in all contract series.
Where the “at the money” strike price of the underlying commodity moves, additional strikes will be added each business day.
MarginOptions will be subject to Initial Margin and Net Liquidation Value variation margin on a daily basis.
Business DaysUK business days

2. Contract Listing at Launch

Quarter 2 – 2011 01/03/2010
Quarter 3 – 2011 02/05/2010
Quarter 4 – 2011 01/09/2010
2012 01/12/2011
2013 03/12/2012

Please see the attached listing shcedule for further information

3. Contract Codes

ContractContract SeriesContract Code
API 2 OptionQuaterA2Q
API 2 OptionCalendarA2C
API 4 OptionQuaterA4Q
API 4 OptionCalendarA4C

4. Clearing System Used

The Coal option contracts will be cleared using the existing ECS system – the system used for all EnClear markets
ECS will be open for trade registration of Coal swaps and option contracts from 08:00 to 17:00 hrs UK time and until 18:30 for member confirmation

5. Clearing Member Participation

Clearing of Coal swap and option contracts is open to any member approved by the Clearing House to clear trades in the LCH EnClear OTC Clearing Service for Freight. All Freight Clearing Members are required to fill in a position account Static Data Form to activate existing accounts or to request new accounts for these contracts.  Position accounts that have been previously activated for Coal swap contracts will be automatically set up for use for the options contracts.

Additionally, Clearing Members must also complete the relevant sections of the ECS User Account Request Form to extend the product coverage for their existing ECS users to cover coal contracts.

Please contact the Membership department at membership@lchclearnet.com to request a Static Data Form or ECS User Account Request Form. 

Members who are currently not approved as Freight Clearing Members who wish to participate in clearing Coal contracts, should contact the LCH.Clearnet Ltd Membership department at membership@lchclearnet.com.

6. Margin Methodology

The new Coal options contracts will be margined using London SPAN version 4.  Details of all margin obligations will be included in the standard suite of member reports that are available through the extranet website.  All margins will also be posted to the LCH.Clearnet Banking system and details will be included in all the usual Banking reports and screens.

LCH.Clearnet will publish margin rates for the new contracts in a separate circular.  Details will be found under the ‘Risk Management’ section of the LCH.Clearnet website.


7. Fees

The clearing fee charged by LCH.Clearnet for the Coal contracts will be US$15 per lot per quarter, US$60 lot per calendar.  No exercise or settlement fees will be charged.

If you have any questions relating to this circular, please do not hesitate to contact Jason LaBrooy on 020 7426 6323 or jason.labrooy@lchclearnet.com. Alternatively, more information on the coal contracts is available on our website at www.lchclearnet.com/commodities

Yours sincerely

Isabella Kurek-Smith
Director, Head of Energy and Freight Markets
Commercial Services

*Trademark and copyright notice 

API 2 and API 4 are trademarks and are used under license from Argus Media Limited and IHS Global Limited.  All copyrights and database rights in the API 2 and API 4 indices belong exclusively to Argus Media Limited and IHS Global Limited and are used herein under license.  LCH.Clearnet Ltd is solely responsible for the API 2 cif ARA and API 4 fob Richards Bay (Argus/McCloskey) Coal Swap and Options Contracts.  Argus and IHS take no position on the purchase or sale of LCH.Clearnet’s financially settled listings.