Introduction of LME Swaps Contracts on The London Metal Exchange

Introduction

The London Metal Exchange Limited (LME) and LCH.Clearnet Limited (LCH.Clearnet) are currently preparing for the launch of LME swaps contracts for eight non-ferrous metals. This circular provides information about these contracts.

Launch Information

The launch of LME swaps contracts for eight non-ferrous metals will take place on Monday, 23 January 2012. These are based on the OTC CAPS products originally launched in 2008.

Systems used for Clearing

Clearing of the LME swaps contracts will be processed in Synapse, the same system as other LME contracts.

Trade registration and novation

Trade validation, registration and trade pending processes will work in exactly the same way as for all other LME contracts. The timing of novation of trades presented for registration will also be the same as all other LME contracts.

Position management

LME swaps positions will be held open at the original trade details until the prompt date in the same way as the metals contracts.

At the end of each business day, all open positions will be revalued and non-realised (contingent) variation margin will be calculated, using LME swaps closing prices, published by the LME.

Valid Prompt Dates

The first tradable month will be January 2012.  The tradable months are given below.

LME Swaps Contracts – USD Only

Please refer to the LME website for details about contract specifications:

http://www.lme.com/what_contracts_swaps.asp 

Settlement management

The contracts are cash settled therefore there will be no deliveries. Settlement of open positions will be by close out.

All open positions for the prompt month will be closed out for differences on the last day of the prompt month with payment of profits and losses made on the next successive business day.

Market data management

The LME swaps closing prices will be calculated by LCH.Clearnet on the same basis as the underlying futures for the associated TAPO (Notional Average Prices), and will be provided by LME along with all other closing prices.

LCH.Clearnet will calculate any missing monthly prices not entered by LME as it does for all current price sets as well as discount factors for all months.

The forward curve for LME swaps closing prices will be discounted.

The final closing price for the LME swaps on the expiry day will be the average of the settlement prices entered through the month and currently calculated by Synapse for TAPO declaration and known as MASP (Monthly Average Settlement Price).

Prices for the LME swaps will be available to Members along with all other LME prices. 

Clearing Procedures

These contracts will be cash settled and processed by Synapse in the same way as existing LME contracts.

PPS and Banking Procedures

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

Margin Methodology

Contracts will be margined using London SPAN in the same way as all other LME contracts. Details of all margin obligations will be included in the same Synapse reports as for all existing products. Also all margins will be posted to the LCH.Clearnet Banking system and details will be included in all the usual Banking reports.

London SPAN Parameters

LCH.Clearnet has published margin rates for the new contracts in a separate circular. Details can be found under the ‘Margin Information’ section using the link below:

http://www.lchclearnet.com/risk_management/ltd/margin_rate_circulars/lme/2011-10-31.asp

Fees

The registration and cash settlement fees for these contracts are listed below:

All fees are per lot per side. VAT will zero-rated. The same will apply to LME fees collected by LCH.Clearnet on behalf of the LME.

LCH.Clearnet fees will be calculated and charged on an open lot basis as with metals.

Member test environment

We will not be running a Member test phase for this implementation; however our on-going Synapse Member test environment, which will include these contracts, will be available for your use as required. Any testing you wish to undertake should be co-ordinated with the LME, who will be making these contracts available in their test systems from 9th January 2012.

Miscellaneous

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