The world’s largest standardized forward contracts market will be increasing its clearinghouse default fund to twice its current amount next month, evidently as a move to mitigate the risk of member default should the metals market see another steep rise in prices this year.
The London Metal Exchange is increasing its cover by about $1 billion in an effort at hedging itself against another rise like the one seen in nickel earlier this month.
“Due to increases in prices of all LME metals over the past month, the default fund is due to rise in April from $1.1 billion to $2.075 billion,” said the LME in a statement on Friday.
“Each month LME Clear performs a reset in respect of its default fund… The default fund changes regularly as a consequence of the lookback period as new data falls out of the history and new data comes in.”
Aluminium is one of the metals traded on the exchange that is causing concern, as experts expect a price spike in the very near future due to supply fears. Russia’s invasion of Ukraine has proven to disrupt supply lines in and out of Russia, which is one of the world’s most prolific aluminium smelters and alumina refiners.
The loss of part or all of Russia’s 6 percent share of world alumina production places it alongside copper and nickel, with Russia supplying 3.5 percent and 10 percent respectively of the world’s total supply.
The LME suspended trading in nickel for a brief time earlier in the month, as the price per ton topped $100,000. Nickel’s price doubling has been attributed by a source who spoke to Reuters to high rollers on the Exchange wagering on a drop in price prompting suppliers to decrease their holdings and cut back on margin calls.
“Nickel was suspended to avoid default by a member, give them and their clients time to find the cash to meet their margin calls,” explained the source, who was not identified in the report.
The default fund is drawn from members of the LME, and their share is primarily assigned based on the amount of LME contracts they hold.
“If there is a huge uptick in geopolitical risk they might decide to ask for a bigger contribution,” revealed the unidentified source.