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Originating department:Commercial Services
Company Circular No:LCH.Clearnet Ltd Circular No 2932
Service Circular No:LME Circular No 445
Date:11 August 2011
To:All LME Clearing Members

Introduction of Additional Volatility Quotes for LME Traded Options and TAPOs

LCH.Clearnet Ltd (LCH.Clearnet) will start to accept  and utilise wing volatilities for valuing both traded options and TAPOs from Monday 28 November 2011. Currently, LME provides LCH.Clearnet with one volatility quote for the At-The-Money (ATM) strike price for each Traded Option and TAPO expiry month. LCH.Clearnet then derives all closing premium prices for all traded strike prices per expiry for each Traded Option and TAPO using the single volatility quote. Margin calculation is also based on a single volatility per expiry per option type.

With the introduction of this change, LME will provide LCH.Clearnet with five volatility quotes at the corresponding +/- 10, +/-25 and 50 delta strikes within the range of strikes for each traded option and TAPOs expiry month. This will allow the option closing premiums to be priced more accurately and the resulting Net Liquidating Values (NLV) to be more representative of the market valuation for margining purposes.

During the week commencing 31 October 2011, LCH.Clearnet will provide a single test SPAN Parameter file for a given day with the additional volatility quotes included. This will allow for any comparison of margin calculations against equivalent calculation based on production SPAN Parameter file. Further information will be provided nearer the time.

If you have any questions, please do not hesitate to contact one of the following:

Lifan Zhang on +44 20 7426 7979 or email lifan.zhang@lchclearnet.com

Haleema Asmal on +44 20 7426 7571 or email haleema.asmal@lchclearnet.com

David Farrar on +44 20 7426 7582 or email david.farrar@lchclearnet.com

Martin West on +44 20 7426 7089 or email martin.west@lchclearnet.com


David Farrar 
Director, Head of Commodities and Metals 
Commercial Services