By Alex MacDonald 
 

LONDON--U.K.-based clearinghouse LCH.Clearnet Group Ltd. said Tuesday it will accept a certain specification of gold bullion called loco London gold as collateral for margin-cover requirements on over-the-counter precious-metals forward contracts and on Hong Kong Mercantile Exchange precious-metals contracts starting Aug. 28.

LCH.Clearnet Group Ltd. has already been using gold as collateral since 2011 but now will accept loco London gold as collateral. Loco London gold is equivalent to a 400-ounce bar, or 12.5 kilograms of gold, that is stored in London.

The push to use gold as collateral follows similar steps from a growing number of exchanges and banks to increase the use of gold as an acceptable deposit, reinforcing the precious metal's allure as an alternative currency.

CME Clearing Europe, the London-based clearinghouse of CME Group Inc. (CME), announced last Friday that it planned to accept gold bullion as collateral for margin requirements on over-the-counter commodities derivatives. IntercontinentalExchange Inc. (ICE) also uses gold as collateral.

LCH.Clearnet Group Ltd. said it would limit the amount of loco London gold that could be used as collateral to 40% of the total margin-cover requirement for a member across all products and a maximum of $200 million, or roughly 130,000 troy ounces, per member group.

LCH.Clearnet also said it would apply a haircut of 14% to the use of gold as collateral. The haircut is in keeping with similar actions taken by CME Clearing Europe.

Clearinghouses apply haircuts across a wide range of asset classes to reduce pricing risk should the collateral asset, whether gold or government securities, depreciate in value.

Clearinghouses sit in the middle of a transaction, assuming the counterparty risk involved when two parties trade. Initial and variation margins are collected from members to fulfill their obligations should any problems arise.

--Francesca Freeman contributed to this article.

Write to Alex MacDonald at alex.macdonald@dowjones.com