Introduction of Clearing of Bilaterally Traded Over The Counter Silver Forward Contracts

Introduction

LCH.Clearnet Ltd is to add Silver to its LCH EnClear over the counter (OTC) Precious Metals clearing service from April 2 2012 subject to FSA approval. The service will provide clearing for bilaterally traded OTC Silver forwards contracts and is provided in conjunction with the London Metal Exchange (LME). This circular provides the following information about the new product:

• Launch information
• Systems used for trade capture
• Systems used for 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 Silver forwards will be on 2 April 2012.

All prospective users of this service should contact [email protected] to register their interest so they can be informed when the Member test environment is updated to include the OTC Silver contract to enable testing. The test environment will be available from 19 March 2012.

Existing LCH EnClear OTC Precious Metals Clearing Members are required to complete a static data form confirming their physical settlement details. New members to this service will be required to extend their current clearing membership to include LCH EnClear Precious Metals membership, and demonstrate operational capability (including access to 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 7949 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 the relevant LME notices.

Systems used for Clearing

Clearing will be supported by 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/.

Valid Prompt/Value Dates

On 2 April 2012, the first clearable prompt date will be TOM, 3 April 2012, and all good London and New York business days will be clearable from that date out to 3 years forward.

Contract Code

The Contract Code for clearing OTC Silver forwards will be AGD.

Pending Trades

The traded price and volume of OTC Silver 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 1000 lots The price limit is set to be identical to the prevailing scanning range for each product.

Physical Settlement

Cleared OTC silver forwards will be expected to physically settle as a single net daily position transfer, to or from, each member’s loco London unallocated silver account with their LPMCL clearer in line with current OTC market practices and deadlines. The USD payment for silver 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 the Membership Team.

Margin Methodology

OTC silver forwards will be margined using SPAN version 3.

Variation margin methodology will be on a settle to market process where profits and losses are realised each day and paid and received as cash in the same way as OTC Gold.
As profits and losses will be realised as cash each day we will not be using the discount factors to calculate the net present value of the variation margin and initial margin.
Details of all margin obligations for OTC silver forwards will be included in the same Synapse reports as for existing LME products. Margins will also 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’ section of the LCH.Clearnet website.

Fees

Note: LCH.Clearnet 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)

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

                                  
David Farrar

Director, Head of Commodities and Metals, Commercial Services

Appendix A