LME Clear today issued a consultation proposing a range of measures aimed to further bolster the resilience, transparency and fairness of its markets.
The proposals include an increase to the minimum net capital requirement for members and the introduction of a default fund mutualisation limit and anti-procyclicality control.
Michael Carty, LME Clear CEO commented:
“Last year we committed to an ambitious programme of change to strengthen our markets, and these are the latest set of proposals designed to increase transparency, predictability and overall resilience for clearing members and market participants more broadly. I would like to thank members for their collaboration in the process so far and look forward to working together as we continue to advance our business and further enhance the health and vibrancy of our markets.”
LME Clear has undertaken a review of its membership terms and proposes to enhance credit-related requirements by increasing clearing members’ minimum net capital requirement from US$10 million to US$30 million. This proposal, which has been discussed with the relevant committees and advisory groups, would better align member capital requirements with those of peer CCPs and reassure market stakeholders of the resilience of LME Clear markets.
Following a comprehensive review of its default fund methodology, LME Clear is also proposing to move further towards a “defaulter pays” model and introduce an upper limit to the default fund, which would restrict the size of the mutualised component of the pre-funded resources paid by clearing members. This would ensure that the proportion of mutualised risk is fairly and more stably correlated with unmutualised risk, which is calculated by LME Clear as initial margin or additional margin. The limit would also be calculated in accordance with the published default fund methodology, providing transparency and determinism to the calculation process.
Additionally, LME Clear has proposed to introduce an anti-procyclicality control to improve the stability of the default fund. This would limit the percentage by which the default fund can fall in any one re-calculation, and would work with the default fund limit to ensure member contributions are more stable and predictable.
The consultation also proposes a minor LME rulebook revision related to the refinement of Category 5 membership as well as a number of technical and administrative changes to the LME Clear rules and procedures.
The consultation invites feedback from all stakeholders by 16 December 2024.
