LCH is jointly owned by the six banks - Barclays, Lloyds, Midland, National Westminster, Royal Bank of Scotland and Standard Chartered. Standard Chartered owns 10 per cent, while the other five own 18 per cent each.
They will provide a new guarantee facility of pounds 150m from their own resources as of 1 February, replacing an independent pounds 200m facility largely backed by the insurance market. The financing will back LCH's contractual obligations to its member firms.
The London Clearing House acts as the final guarantor of all trades on London's futures exchanges. It aims to back the trades of the rest of the market even if an exchange member firm fails, as Drexel Burnham Lambert did several years ago. To protect itself against defaults, it can call in members' margins, or deposits, on their trading positions.
LCH's bank owners decided to finance LCH themselves because insurers are now reluctant to provide specialised insurance and are increasing the premiums for such business. The banks believed that the cost of the LCH guarantee backing would soar this year. Trade Indemnity Plc underwrote the existing facility.
'The alternative we've set up is likely to be far less costly,' one banker said.
Each bank will contribute pro- rata according to its share ownership in LCH. One said it did not expect to make a provision for the amount.
Though lower than the existing guarantee, the new facility was 'fully adequate', given LCH's record and management, Denis Child, chairman, said.Reuse content