LCH.Clearnet launches clearing for OTC steel swaps

London, 18 October 2010

LCH.Clearnet Ltd (LCH.Clearnet) has today launched clearing for over-the-counter (OTC) hot rolled coil steel swaps. The service is a natural extension to LCH.Clearnet’s market leading OTC offering and complements the successful freight and iron ore services.

Steel is the world’s second largest commodity market. In the last 10 years, production has increased 44% from 848 million tonnes to 1.2 billion tonnes, with China accounting for 568 million tonnes. Clearing steel swaps contracts will increase trading capacity and reduce concerns over counterparty risk, enabling further growth of the market.

The three contracts launched by LCH.Clearnet for hot rolled coil in Northern and Southern Europe and in China will be monthly cash settled. The two European contracts will settle against the Steel Index (TSI) and the Chinese contract will be based on the Cleartrade China Steel Index (CCSI, provided by Umetal). 

Isabella Kurek-Smith, Director, Head of Freight and Energy Markets at LCH.Clearnet said: “We are seeing a growing demand for cash settled swaps in the steel market and there is clear support from key brokers who wish to build liquidity in this exciting emerging market. These contracts will complement and trade alongside our successful iron ore and freight products, providing efficient risk management for market users and our members. We are delighted to support this development and provide the certainty in terms of counterparty risk management that the market requires.”

Industry users also welcomed the introduction of cleared contracts:

“TSI is delighted to be providing the settlement index for the first cleared HRC North and South Europe contracts.” Steven Randall, Managing Director of The Steel Index said. “There is a growing need for cleared, cash settled steel swap products to enable more accurate hedging and risk management. These contracts will build on the success of the TSI iron ore index which has helped to make iron ore swap trading a new commodity class.”

Commenting on the development, Mark Lyons, Trading Manager, Iron Ore and Steel Derivatives at Cargill said: “Cargill has been a strong advocate of a new type of steel derivative that fulfils the need for a cash settled instrument and we will continue to see this market develop. The availability of cleared contracts will enable us to protect the value of assets and will also result in improved transparency for the buyers and sellers, which will be as beneficial to the steel mills as it will be to their customers.”

To view the press release as a pdf click here.

About LCH.Clearnet

LCH.Clearnet is the leading independent clearing house group, serving major international exchanges and platforms, as well as a range of OTC markets.  It clears a broad range of asset classes including: securities, exchange traded derivatives, commodities, energy, freight, interest rate swaps and euro and sterling denominated bonds and repos; and  works closely with market participants and exchanges to identify and develop clearing services for new asset classes.

A clearing house sits in the middle of a trade, assuming the counterparty risk involved when two parties (or members) trade.  When the trade is registered with a clearing house, it becomes the legal counterparty to the trade, ensuring the financial performance; if one of the parties fails, the clearing house steps in.  By assuming the counterparty risk, the clearing house underpins many important financial markets, facilitating trading and increasing confidence within the market.

Initial and variation margin (or collateral) is collected from clearing members; should they fail, this margin is used to fulfill their obligations.  The amount of margin is decided by the clearing house’s highly experienced risk management teams, who assess a member’s positions and market risk on a daily basis.  Both the soundness of the risk management approach and the resilience of its systems have been proven in recent times.

LCH.Clearnet is regulated or overseen by the national securities regulator and/or central bank in each jurisdiction from which it operates.