Introduction of Clearing of Bilaterally Traded OTC Gold Forwards Contracts

Introduction

LCH.Clearnet Ltd is currently preparing to launch a service to clear bilaterally traded OTC gold forwards contracts. This circular provides information about the new service, and includes:

• Launch Information

• Systems used for trade capture

• Systems used for trade Clearing

• Valid Prompt/Value Dates

• Contract Code

• Pending Trades

• Physical Settlement

• PPS and Banking Procedures

• Margin Methodology

• SPAN Parameters

• Fees

• Contract Terms and Delivery Procedures

Launch Information

The launch of the clearing service for bilaterally traded OTC gold forwards will be on Monday, 29 November 2010.
All prospective users of this service should contact [email protected] to register their interest so that they may be included within the member test program which is due to start on Monday 25 October 2010.

Existing Clearing Members are required to complete a legal agreement to extend their current Clearing Membership to clear OTC Bullion contracts, and demonstrate operational capability (including access to the Synapse and LMEsmart systems, confirmation of standard settlement instructions with a London Precious Metal Clearing Limited member, and attendance on associated training). 
Please contact Membership Team on +44 (0)20 7426 7063/7627/7521/7968 or [email protected] for further details.

Systems used for Trade Capture and Matching

Trade capture and matching will be supported by LMEsmart.

Please refer to LME Notice 10/319 : A312 issued 8 October 2010 and its attachments. These detail both the additional documentation required by the LME for the use of LMEsmart to clear this OTC product and the LMEsmart matching instructions for OTC gold forwards.

Systems used for Clearing

Clearing will be supported by LCH.Clearnet Synapse; all LCH.Clearnet project information and Technical Documentation is available on a dedicated OTC Bullion section of the secure area on the LCH.Clearnet website at www.lchclearnet.com/secure_area/.  Specifically this includes the following: 

• OP591 LME Gold Forwards Member Functional Changes information, this details any changes to the Synapse systems to accommodate OTC Bullion
• XI Application Guide (6.00.03 XI Plus)
• XI Application Guide Change Control – Members (5.08.06 to 6.00.03)
• PC Bridge v6

Valid Prompt/Value Dates

On Monday 29 November 2010, the first clearable prompt date will be TOM, 30th November 2010, and all good London and New York business days will be clearable from that date out to 10 years forward from the Spot date, 1st December 2020.

Contract Code

The Contract Code for clearing OTC gold forwards will be OGD

Pending Trades

The traded price and volume of OTC gold forward trades presented to LCH.Clearnet for registration are validated against a price range and volume limit file. The volume limit for pending trades is presently set at 1500 lots (150,000 troy ounces) The price limit is set to be identical to the prevailing scanning range for each product.

Physical Settlement

Cleared OTC gold forwards will be expected to physically settle as a single net daily position transfer, to or from, each member’s loco London unallocated gold account with their LPMCL clearer in line with current OTC market practices and deadlines. The USD payment for gold transfers above will be processed through LCH.Clearnet PPS arrangements.

PPS and Banking Procedures

Standard LCH.Clearnet PPS and banking procedures will apply to this product. If you have any queries regarding PPS arrangements please contact Siobhan White on +44 (0)20 7426 7044 or [email protected]

Margin Methodology

OTC gold forwards will be margined using SPAN version 3 in the same way as LME contracts.  To allow the offset with LME contract margins, details of all margin obligations for OTC gold forwards will be included in the same Synapse reports as for existing LME products. Also all margins will be posted to the LCH.Clearnet Banking system and details will be included in all the usual Banking reports and screens.

SPAN Parameters

LCH.Clearnet will publish margin rates for the new contracts in a separate circular. Details will be available under the ‘Risk Management’ / ‘Ltd’ section.

Fees

The data capture, registration and delivery fees for these contracts are as follows:

Note: LCH will collect the LME Data capture fee on behalf of LME

Contract Terms and Delivery Procedures

Contract terms and delivery procedures will form part of the LCH.Clearnet General Regulations, Default Rules, Settlement Finality Regulations and Procedures for these new contracts will be available under the attached link on the LCH.Clearnet website. (www.lchclearnet.com/rules_and_regulations/ltd/default.asp)

Note

Members NOT intending to clear OTC Bullion should consider whether to undertake testing of the following changes as described in the OTC Technical documentation (details provided below).

The main changes to consider are:-

• The SPAN parameter file will be modified to contain
  o An additional Combined Contract: OG
  o Contract and additional Risk Arrays for Gold Forwards
  o A tick denominator for the OG combined contract to reflect the price fluctuation of 0.001.
   

• On External Interface Plus (XI+), although there will be no change to message format, with the launch of the OTC Bullion contract (with daily prompt dates for ten years forward) there will be a significant increase in the number of exchange rates and discount factors provided in the L303 Exchange/Interest Rates Search Result message in response to an M301 Exchange/Interest Rates Search Request.

• Any Synapse generated reports and data extracts that contain prices, including abbreviated prices, will show USD, GBP and EUR values to three decimal places. For JPY there is no change.

Questions relating to the topics covered in this circular should be directed to the following:

Yours sincerely,

David Farrar
Director, Head of Commodities and Metals, Commercial Services