HONG KONG (Reuters) - The head of the clearing house for the London Metal Exchange on Wednesday said interest was growing from major commodity financing banks to use metal as collateral for margins.
Clearing houses require users to put down a deposit, or margin, to ensure they can meet their trading obligations.
Commodities companies often have much of their value tied up in assets such as metals or mines, so enabling firms to use metals to directly meet requirements to fund margins will help them free up capital, said LME Clear Chief Executive Officer Adrian Farnham.
“You can now pledge copper against your copper positions. We have already had a number of members starting to work with us. A big Canadian bank very recently started using warrants as collateral,” he said on the sidelines of the LMEWeek Asia conference in Hong Kong. Warrants are documents of possession.
“Maybe five or six different participants have used that system so far. That’s in its infancy but it’s starting to be used, but we’re continuing to tweak and enhance that service.”
Commodity companies typically receive finance from banks upwards of 95 percent of the value of their metal that is held on the LME, but only recently have started to directly use the commodity as collateral for clearing house margins.
Meanwhile, Farnham said the company’s clearing process was continuing to develop. Beyond LME clearing members, clients of those members would also be able to post their metal assets to the clearing house.
There was also scope to use metal held in the LMEshield system, which is able to verify metals stocks held outside the exchange, and may extend into other commodities in future, he said.
“The stage after that will be to use it for broader financing needs, not just the initial margin,” he said.
Reporting by Melanie Burton; Editing by Joseph Radford