Who is LCH.Clearnet Limited?

LCH.Clearnet Limited has been established in the City of London for over 100 years.

LCH.Clearnet Limited acts as central counterparty (CCP) for trades transacted on London's major exchanges - LIFFE (The London International Financial Futures & Options Exchange), LME (London Metal Exchange) and the London Stock Exchange. LCH.Clearnet Limited also offers a range of its own services for off exchange trades known as over-the-counter - SwapClear®, RepoClear ®, EquityClear® and EnClear®.

A central counterparty clearing house acts as a go-between when two parties trade. Once the trade is made, any monetary risk involved (i.e. if one party fails to meet its obligations due to bankruptcy) is borne by LCH.Clearnet Limited acting as guarantor for the trade.

LCH.Clearnet Limited is owned by its members - ranging from the top investment banks to small commodity traders - and by three London exchanges (LIFFE, ICE Futures, LME).

How and why did it all start?

LCH.Clearnet Limited started life back in 1888 as the London Produce Clearing House. The ships (which were still powered by sail), loaded with coffee or cocoa beans, docked at St Katherine's dock in the City of London. Before LPCH was established, traders would deal direct with each other in the coffee houses in the City but these trades were not guaranteed and involved considerable financial loss in the event of either party being unable to fulfil their commitment. Thus LPCH was born, sponsored by a group of commodity traders and merchant banks to protect their investments.

Developments

LPCH became the International Commodities Clearing House (ICCH) in 1973 and continued to act as a central counterparty for commodity trading. However, in 1991 it again changed its name to London Clearing House to more accurately reflect its business at that time - not only in commodities but a range of financial instruments. In 2003 The London Clearing House Limited and Clearnet SA merged to become a single European clearing house known as LCH.Clearnet Group.

The Risk Attached

As the central counterparty to its members, LCH.Clearnet Limited is exposed to their potential default. This risk is managed by applying strict requirements for membership and continual review, position monitoring and margining.

Before being accepted as a member of LCH.Clearnet Limited, we make sure that the company applying can meet a number of requirements such as appropriate authorisation in accordance with the Financial Services and Markets Act 2000 and minimum capital resources.

We monitor daily each member's risk in relation to its ability to cover its margin liabilities and meet delivery obligations. We look for unusual movements to make sure that LCH.Clearnet Limited reduces its exposure to possible default.

Margining means that we assess the risk to a member's trade and, depending on the level of risk attached, we take an amount from the company before we guarantee the trade, to ensure that we have money to 'cover our losses' should that company not be able to meet its obligations.

The Future

Could you be the future of LCH.Clearnet Limited......?