All listed commodity futures and options cleared at CommodityClear benefit from LCH’s world class risk management procedures and state-of-the-art protections for both cleared positions and collateral posted against those trades.
Initial margin for CommodityClear SA is calibrated to meet any losses under normal market conditions incurred during a Clearing Member default, to a 99.7% confidence level.
Initial margin requirements can be met in cash or in selected government or agency securities with low credit, liquidity and market risks. All securities collateral is subject to a haircut applied to cover market, credit, concentration/liquidity, wrong way and foreign exchange risks. Haircuts are calculated to a 99.7% confidence level over a 3 day horizon based on a 10 year look-back period.
Variation margin requirements must be met in cash.
Additional margin is collected to cover position concentrations, wrong way risk, illiquid positions and Clearing Members with lower credit standing or capital support.
Margins are back-tested daily for each Clearing Member and subaccount against this confidence level, and are reported monthly at clearing service level to regulators and at least quarterly to the LCH SA Risk Committee.
CommodityClear SA has detailed default management plans and procedures consistent with the LCH SA Default Management Policy.
These provide clear criteria on when to call a Clearing Member into default and the steps to be followed in order to manage such a default event. The policy also requires frequent default management testing or ‘firedrills', at both product and cross product levels.
CommodityClear’s mutualised default fund is calibrated monthly and tested daily to be sufficient to withstand the simultaneous default of the two Clearing Members giving rise to the largest losses calculated under scenarios of extreme conditions – known as a Cover 2 event.
The default fund has a floor and a cap to ensure minimum levels of protection and to avoid over-mutualisation. All Clearing Member contributions to the default fund are subject to a minimum amount and re-calibrated monthly in proportion to the risk they introduce into the mutualised pool.
All Clearing Members with large stress losses over margin are charged additional margin where the cap would otherwise be exceeded and intra-month if credit related tolerances are reached.
A proportion of LCH SA capital is placed ahead of non-defaulting Clearing Member contributions in the waterfall to be consumed first in the event that the defaulting member’s posted margin and default fund contribution are not sufficient in resolving its failure.