The LME Clear Board delegates overall responsibility to the LME Clear Default Management Committee for the default management process and all related strategic decision making involved in the risk reduction/neutralisation strategy and the subsequent auction employed by LME Clear.
LME Clear default management procedures govern the processes that apply to Members in the case of a Clearing Member default; Clearing Members remain responsible for the credit risk of their clients. These procedures facilitate transparent and practical market action in stress situations.
LME Clear has procedures in place, both internally and with all Members regarding the processes to manage a default. A detailed description is available in Default Management Process
The stringent membership admission requirements to LME Clear are the first line of defence, guaranteeing that all clearing members meet basic conditions and have the necessary resources and knowledge. A clearing member must successfully complete simulated default tests to demonstrate they have the appropriate expertise and operational processes in place prior to beginning clearing operations. Once live, all clearing members are required to participate in fire drills regularly to confirm their operational readiness to manage a member default.
In broad terms LME Clear will look to neutralise risk by hedging the overall House position of a defaulting member against the most liquid market dates and roll forward any prompt physical delivery positions to manage its risk. LME Clear will then seek to auction the defaulting member’s remaining house portfolio to other participants as its preferred method of disposal; however it will also be able to execute the close out of all remaining open house positions if required.
See the link below to explain the protections and actions for clients in the event of a Member Default.
Client Accounts and Default Management
For further information please refer to LME Clear Rules and Procedures