LCH.Clearnet and London Metal Exchange launch OTC gold post-trade services to London's bullion market

- Venture will utilise new LBMA gold forward curve for pricing data and margining forward positions

London, 06 December 2010

LCH.Clearnet Limited (LCH.Clearnet), the global leader in clearing, today launched clearing for the over-the-counter (OTC) wholesale London gold market in a joint initiative with the London Metal Exchange (LME).
London is the world’s largest market for OTC gold.  In October 2010, the average daily turnover in London was 532 tonnes, equivalent to almost a quarter of the world’s annual gold supply, and in 2009, total OTC trading turnovers equalled approximately $5 trillion.*

The post-trade service allows bilateral OTC trades to continue to be negotiated and executed as per current market practices.  Transactions are captured via LME’s trade capture system, LMEsmart, with matched bilateral trades submitted to LCH.Clearnet for clearing through its multi-asset clearing system, Synapse. The contracts will be marked to market using the LBMA forward curve, providing participants with a transparent and reliable source for margining their forward positions.

Introducing clearing to the wholesale London gold market enables participants to mitigate counterparty risk and benefit from straight-through processing efficiencies. In addition, market participants are able to benefit from margin offsets with other metal contracts listed on the LME, improved collateral management, enhanced balance sheet management and lower operational costs.

Initially, clearing is available for OTC gold forwards for daily value dates from spot out to 10 years. Cleared trades will be priced in $US and it is intended that LCH.Clearnet and the LME will also develop similar OTC clearing services for silver, platinum, palladium and gold options.

Roger Liddell, Chief Executive, LCH.Clearnet said: “We wanted to bring all the benefits of clearing to the bullion market, whilst enabling them to preserve the OTC nature of the business which makes it such a success. Together with the LME, we look forward to supporting the future growth of the bullion market. ”

Martin Abbott, Chief Executive, LME said: “We have been working closely with LCH.Clearnet to give the London bullion market participants a smooth route to clearing through our trade capture platform. Gold traders can now send booked trades through LMEsmart to clearing enabling them to mitigate counterparty risk and cross-margin against other LME products they may be trading such as copper and aluminium.”

*sources: London Bullion Market and World Gold Council

To view the press release as a pdf click here.

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About the London Metal Exchange

The London Metal Exchange is the world's premier base metals market. It offers metals price risk management tools including futures and options contracts for aluminium, copper, tin, nickel, zinc, lead, aluminium alloy and NASAAC, steel billet, plastics and the minor metals - cobalt and molybdenum. Last year, the total value of trading was $7.41 trillion and the Exchange currently has 5.96m tonnes of material on warrant in 633 storage facilities across 39 locations globally.

http://www.lme.com/

About LCH.Clearnet

LCH.Clearnet is the leading independent clearing house group, the world’s largest clearer of OTC derivatives and in addition serves major international exchanges and platforms.  It clears a broad range of asset classes including: securities, exchange traded derivatives, commodities, energy, freight, interest rate swaps, credit default 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.