Introduction of Additional Volatility Quotes for LME Traded Options

LCH.Clearnet will start to accept and utilise additional volatility points for margining purposes for each quoted month for Traded Options from The London Metal Exchange (LME) from 18 April 2011.

From 21 March 2011 for a period of four weeks ending 15 April 2011, we will provide Members with access to a test SPAN file incorporating the additional volatility points as well as a test environment from which to obtain test closing price data including these additional volatility quotes in order to undertake any testing or margin comparisons required. This is not a mandatory test. We will publish more details in the coming weeks.

Background

Currently, LME provides LCH.Clearnet with one volatility quote for the At-The-Money (ATM) strike price for each option expiry month. LCH.Clearnet then derives all closing premium prices for all valid strikes prices within each option expiry month using the one volatility quote.

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 option expiry month. This will allow traded options 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.

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

William Chin on +44 20 7426 3775 or email [email protected]

Gary Lyons on +44 20 7426 7122 or email [email protected]

David Farrar on +44 20 7426 7582 or email [email protected]

Martin West on +44 20 7426 7582 or email [email protected]

David Farrar 
Director, Head of Metals and OTC Bullion
Commercial Services