How It Works - LCH.Clearnet SA

Principles - Derivatives Market Trades

Recording trades

Trading members execute trades through the LIFFE CONNECT platforms. As soon as trades are matched, they are recorded by the trading system. All the options and futures admitted on this platform are systematically transmitted to LCH.Clearnet SA in real time.

Trades are considered to be novated, i.e. guaranteed by LCH.Clearnet SA, as soon as they have been matched in LIFFE CONNECT. Novation is the process whereby LCH.Clearnet SA interposes itself between the two parties to the trade. LCH.Clearnet SA thus becomes the buying counterparty for the seller and the selling counterparty for the buyer.

When CLEARING 21® receives the trade, it notifies the member that a trade has been created. The member must then either post the trade to one of its accounts or give it up to another clearer. Give-up consists in transmitting a trade to another clearer who must accept it ("take it up") and post it. There are three sets of parameters for posting and give-up/take-up: manual, systematic and automatic.

The member can also make adjustments to its positions, e.g. posting corrections, position transfers, exercise, abandonment (only when the contract involved matures) and offsetting.

Determining net positions

At the end of the trading day, LCH.Clearnet SA updates the positions, taking account of exercises and assignments. LCH.Clearnet SA sends each CMF notification of all his positions with the clearing house, by account type and by account. Each position corresponds to a particular date, a particular CMF, a particular contract and a particular currency.

Calculating initial margin and variation margin

Once the positions at the end of the trading day have been determined, LCH.Clearnet SA calculates the premiums, initial margin and variation margin to be paid or received by each clearer. After the exercise/assignment of products for cash settlement, an amount is to be received or paid by the CMF. Chapter 5 – Risk Management explains the method used to calculate initial margin and variation margin.

Payment of variation margin and initial margin

The financial requirement (initial and variation margin call and clearing funds contribution) is calculated for each market separately, LCH.Clearnet SA gives to the members the possibility to centralise their deposits of collateral for all markets and to pay the sum of all financial requirements in one “global” margin call (one debit/credit flow on the CMF or Participant de Règlement account) . 

LCH Clearnet SA carries out the collect of collateral (initial and variation margin call, clearing funds contribution) automatically every day via its 6 ancillary systems (4 systems for cash settlement and 2 systems for Central Bank guarantee system): LCH.Clearnet SA sends the direct orders to the Central Banks (Banque de France in France, Banque Nationale de Belgique in Belgium, Banco de Portugal in Portugal and  De Nederlandische Bank in the Netherlands) to debit or to credit the current payment account (Compte Courant de Règlement - CCR) opened in one of these banks by the CMF itself or by his paying agent (Participant de Règlement - PR if the CMF does not have a CCR), or to freeze the credit facilities of the CMF (system used by De Nederlandische BankNV and Bank National de Belgique).
LCH.Clearnet SA informs the paying agent and the CMF of the amount to be debited or credited at 7:30 a.m. for DNB system and at 9:30 a.m for the other systems. If the CMF or his paying agent does not express their disagreement with the amount to pay at the latest at 8:00 a.m. for DNB system and at 10:00 a.m. for the other banks, the settlements are considered as executed and the central banks record the transactions.

If one of the settlements is not executed before 8:00 a.m. at DNB and 10:30 a.m. at the other banks, it is automatically rejected by the system and the CMF is considered to have caused a technical default or a default.

Managing default events

In the event of a technical default on the payment of funds within the set timeframe, the paying agent or the CMF must make a large-value payment (a large-value electronic transfer) to the LCH.Clearnet SA account at the affected Central Bank (Banque de France in France, Banque Nationale de Belgique in Belgium, Banco de Portugal in Portugal and  De Nederlandische Bank in the Netherlands) to meet its margin call or to transfer securities to obtain complementary facilities (in the case of Central Bank guarantees system) by 8:30 a.m. for DNB and by 11:00 a.m. for the other Central Banks.

If no payment or transfer of securities is made by this time, the procedure applied by LCH.Clearnet SA depends on the origin of the default, i.e. the member’s own positions or client positions.

In the event of an own-account default, LCH.Clearnet SA liquidates the member’s own positions for the amount of the margin call in order to reduce its risk exposure. At the same time, LCH.Clearnet SA transfers all the client positions, initial margins and variation margins to another CMF.

In the event of a default on a client position, the member must liquidate that client's positions for the amount of the margin call in order to reduce its risk exposure.

Delivery of MATIF products

Some futures contracts give rise to physical delivery of commodities.

Physical delivery of commodities

The MATIF contracts that give rise to delivery of commodities are: ECO (rapeseed), EBM (milling wheat) and EMA (corn).

At the time of delivery, the commodities clearers’ positions are recorded net for the house account and gross for client accounts.

There are two procedures for the physical delivery of commodities: the so-called “alternative” procedure and the MATIF procedure.

The alternative procedure means that the buyer and seller have signed a business contract and transmitted it to LCH.Clearnet SA within three days following the maturity of the contract. When the contract is received by LCH.Clearnet SA, the procedure is considered completed with regard to the clearing house.

The MATIF procedure is initiated when the members want the whole of the delivery to be guaranteed by LCH.Clearnet SA. This procedure takes place during a one-month period month, during which LCH.Clearnet SA intervenes at each stage of the delivery.

Delivery of Equity options

For deliverable (equity) options, the exercise / assignment process creates trades on the underlying stocks. These trades are then entered as normal trades in Clearing 21 â cash market and trade messages are generated.

For stock options, each derivatives member (both trading and clearing members) must designate a single associated cash trading member. The exercise / assignment process generates trades between the cash trading member associated with the assigned member and the  cash member associated with the exercising member.

An exercise / assignment process executed in D day creates a trade on the underlying stocks at D business date (D+3 settlement date).

Timetable of a clearing day