The London Metal Exchange is giving serious consideration to the possibility of building its own clearinghouse, its chief executive said Tuesday, a move that would make it the latest market operator to bring the function in-house.

LME taking control of its own clearing functions would contribute additional fees to the exchange and also mark another loss for London-based LCH.Clearnet, the trade-clearing company that last year saw NYSE Euronext (NYX) announce plans to build its own clearinghouse units.

The LME's decision to examine self-clearing is part of a strategic move "in a world where the horizontal clearing model is being steadily eroded," LME CEO Martin Abbott told traders in a notice.

"In addition it should be noted that we believe self-clearing would also be accretive to earnings at the LME," Abbott said. The exchange plans to consult with shareholders, members and other stakeholders on the matter, although no deadline has been set for a final decision.

LCH.Clearnet, which is currently contracted to clear trades for the exchange, said it hasn't received notice from the LME or any indication regarding the likely timeframe required for a decision to be made.

"We value our relationship with the LME and shall continue to provide the LME and its members with an excellent service and the benefit of our unique experience in clearing for this complex market -- we are a leader in commodities clearing globally," said LCH.Clearnet CEO Ian Axe in a statement responding to the LME notice.

LME's main business lies in trading futures and options contracts on metals such as copper, aluminum and zinc. The 134-year-old market last year ranked as the 19th-largest derivatives exchange worldwide with more than 120 million contracts traded, according to figures compiled by the Futures Industry Association.

Clearing trades involves a central counterparty acting as the buyer to every seller and the seller to every buyer, ensuring a robust middleman that can absorb the impact of a major market participant's default. The function has been embraced by regulators around the world as an antidote to the systemic risk represented by some off-exchange derivatives markets, underscored by the 2008 financial crisis.

Developing its own clearing unit would see the LME take a page from much-larger rivals such as Deutsche Boerse's (DB1.XE) Eurex exchange and CME Group Inc. (CME), which run their own clearinghouses and have used the capability to develop new services for over-the-counter derivatives markets.

Taking control of trade-clearing is also seen granting a competitive edge. NYSE Euronext officials said last year that running its own clearinghouse would enable it to develop new products and services more quickly than it could under its existing relationship with LCH.Clearnet.

-By Rhiannon Hoyle, Dow Jones Newswires; +44 (0)20 7842 9405; rhiannon.hoyle@dowjones.com
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