Coal option volumes reach 2.46 million tonnes

London, 14 April 2011

LCH.Clearnet Ltd (LCH.Clearnet) has cleared the first single expiry OTC coal options trades. Initial transactions have totalled 670 lots in API 2 options to date, across both quarterly and calendar tenures, reaching volumes of 2.46 million tonnes. 

The use of thermal coal in power generation continues to increase in Asia, driving demand for coal option contracts which offer diversification to hedge funds, banks and physical market participants looking to manage price risk or gain exposure to price volatility. Clearing these contracts increases trading capacity and reduces concerns over counterparty risk, enabling further growth of the market. The API 2* and API 4* indices are the key focus of coal management, accounting for 90% of the world’s coal derivatives trading.

Isabella Kurek-Smith, director, energy and freight, LCH.Clearnet said: “We are delighted to have cleared these first trades. These encouraging figures indicate a strong demand for the benefits of cleared coal option contracts. We look forward to supporting the growth of the market with our competitive, robust and efficient clearing service.” 

Adrian Binks, Argus chairman and chief executive officer said: “International coal markets have enjoyed a resurgence this year, with new entrants adding to already robust activity. Volatile energy prices, including coal, have underscored the need for innovative risk management tools and we are pleased the industry has found the LCH.Clearnet’s service valuable. New clearing and settlement facilities for API 2 and API 4 options will foster continuing growth in these liquid and dynamic markets.”

The coal option contracts are based on Rotterdam in the Netherlands and Richards Bay in South Africa and are traded in multiples of 5,000 tonnes per month.  The contracts exercise into swaps settled against API 2 and API 4 index prices as published by Argus/ McCloskey’s Coal Price Index Report.

John Howland, publisher, IHS McCloskey, said: “The volatility in the world seaborne coal markets over recent months has highlighted the need for flexible risk management. We are pleased that LCH.Clearnet’s innovative approach has been utilised by the market and that clearing for API 2 and API 4 options adds another service that will encourage more liquidity in these vibrant coal markets."

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*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.

To view the press release as a pdf click here. 

About LCH.Clearnet

LCH.Clearnet (then The London Produce Clearing House Limited) began clearing commodity futures in 1888.  Today it 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, 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, reducing risk,  facilitating trading and increasing confidence within the market.

Initial and variation margin (both 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;  in IRS, six times intraday.  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.