Huw Jones

LONDON, (Reuters) – The London Metal Exchange (LME), took urgent measures Tuesday to stop trading nickel as the price of nickel had risen to over $100,000 per tonne.

As Russia was under Western sanctions, the rise in nickel production could be attributed to short-covering. Some nickel holders, traders said, had not been able to make payments to clearing houses.

What is a CLEAR HOUSE?

Clearing house, which acts as a buffer between buyer and seller in the event of a trade’s default, is an essential part of the financial markets basic plumbing.

LCH (part of the London Stock Exchange CME Clear (NYSE::) Clear, ICE (NYSE;:) Clear and Group (LON/). These entities handle billions of dollars in transactions each year in stocks, bonds and derivatives, as well as metals.

In an effort to enhance transparency and increase the size of clearers, regulatory authorities have increased the number of financial transactions that must be supported by clearing houses since the crisis.

Critics claim that clearing houses are now more important than banks, meaning taxpayers may have bailed them out in the event that one went bust. This is due to their many connections to financial markets.

Clearers needed to build their own defenses, in order that they could cope with two of their largest members going bust, which is usually the banks.

The models that clearers use are also monitored by regulators to ensure the right amount of margin, a form of insurance payment, is used to protect business.

Five of the largest clearinghouses in the world were tested by regulators, and the results showed that the banks had sufficient capital to handle an unexpected increase in volatility.

WHY IS MARGIN IMPORTANT?

Members of clearing houses must post collateral such as cash or treasuries as “insurance” for potential losses and defaults in their positions.

Margin payments are paid in proportion to the value of an asset or contract.

LME is responsible for clearing all metals trading and announced Friday that it would increase margin requirements in nickel contracts by 12.5%, to $2,250 per tonne. At close on Tuesday, March 8, the extra fee will kick in.

LCH increased the margins of some government debt in the euro area debt crisis. Some governments accused LCH of aggravating the crisis.

ICE stated Tuesday that volatility was not a new phenomenon in the commodity market and that all margin calls were met in less than an hour.

However, in stressed markets it may be hard for market participants to quickly raise sufficient cash or collateral to cover the margin call.

Can a CLEARING HOME GO BUST

You can but they are very unlikely to do so, as there are many safety nets before it happens.

Real failures include the clearing house that was set up in France in 1974 and Malaysia in 1983, as well as Hong Kong’s 1987 Clearing House.

LCH was able to unwind Lehman Brothers’ $9 trillion interest-rate swaps portfolio, but it only used about a third. This means that neither LCH or its members sustained losses due to Lehman closing positions.

Nasdaq Clearing was hit with a $36Million fine last year for the default by Einar Aas (Norwegian power trader) in 2018. The clearer had made mistakes in his operations.

Despite the fact that the margin was not sufficient, it was possible to cover the loss by tapping Nasdaq’s capital and clearers default funds, which were contributed equally by all members.

(Reportig additional by Pratima Desiai in London and John McCrank New York. Editing by Jane Merriman.