HOTTER ON METALS: Margin methodology in the clear

The London Metal Exchange and its clearing house are considering a transition to a different way of calculating their clearing methodology.

Right now, variation and initial margining for LME Clear is currently operating under a Discounted Contingent Variation Margin (DCVM), which realises forward profits until the settlement date. This, along with the dates structure of the exchange, is a key reason why the LME is often described as a forward market rather than a futures market. The alternative option on the table is to use a Realised Variation Margin (RVM), which pays profits on a trade date + 1 basis. Would the LME collapse if it moved to a RVM model? Probably not, because it is the same model used by pretty much all exchange-traded and centrally cleared contracts around the world. But if the exchange wants to retain its critical links with the physical market, it is highly unlikely to make that change happen. For sure, it might initially appear to be a positive move to bring forward profits on...

Published

Andrea Hotter

July 10, 2017

02:15 GMT

New York