(ii) Bank Guarantees – LCH charges 10 basis points (annualised) for utilisation. This is
accrued daily and charged on a monthly basis to your PPS account.
(iii) Government Securities, CDs and equities – LCH charges 10 basis points for utilisation.
This is accrued daily and charged on a monthly basis to your PPS account.
Source: LCH.Clearnet.
It must be understood that these are lists of collateral accepted
from the clearing member. The clearing member may or may not be
prepared to accept the same collateral from a client. Even where it
does agree, it may levy additional charges to cover the administration
costs, just like the clearing house does as we see above.
Margining to a client
It is relatively easy to understand the concept of VM. It is possible for
the client to calculate the amounts themselves, in order to verify what
their clearing broker is charging or paying them. Depending on the
complexity of the position, it would be easily possible for the clients to
work it out for themselves using a pen, paper and a calculator, so long
as they know the necessary variables such as the tick size and value.
Initial margin is much harder to explain. For futures contracts
where an initial margin rate is published by the clearing house, it can
be easily calculated and verified by clients, but only if the position is
very simple and no offsets have been given under a portfolio margining
system.
The biggest problem can occur if the client wants to trade a partic-
ular strategy and needs to know how much the initial margin will be
approximately, so that they can work out the financing costs.
It may be possible for some clearing brokers to run test accounts for
clients where such positions could be input and the margining run
using the last available arrays. This would give the approximate cost
but can be very time-consuming for the broker’s staff to accomplish
and would not necessarily be part of a regular service to the client.
Although risk-based margining systems are very efficient and result
in the client paying a lower overall initial margin, clients can find it very
difficult to understand and generally have to take the clearing broker’s
word for it that the amount required is correct. In order for the client to
accurately verify the initial margin required, they need to be able to
receive the risk arrays from the clearing house or exchange and then
have a system, which is able to correctly compute this. Some clear-
ing houses publish their risk arrays openly and clients are able to
obtain the information easily. A charge is usually made for this service
though. Other exchanges do not openly publish the arrays except to
Margin and collateral 139
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