London Metal Exchange lays out timeline for reform

The London Metal Exchange has laid out the timeline for its plans to reform and reverse declining volumes ahead of an annual gathering of the metals industry in London starting Oct. 30.

Discussions during LME Week will range from LME fee cuts to new charges on the use of LME prices for over-the-counter (OTC) transactions and new product launches, including for chemicals used in rechargeable batteries to power electric vehicles.

The 140-year-old exchange, the world's oldest and the largest industrial metals market, proposed a sweeping reform programme in September. Its volumes fell 4.3 percent in 2015 and 7.7 percent in 2016.

Below is a planned timeline with comments from LME Chief Executive Matt Chamberlain.

2017

FEE CUTS

The LME cut fees on short-dated carry trades - trades linking contracts that mature on different dates - on Oct. 1 and will reduce fees on medium-dated carries from Nov. 1. The cuts, which will last for 12 months, could cost up to 15 percent of the LME's revenues over the next year if they fail to stimulate more trading, metal industry sources say.

Chamberlain said the effect of the cut to short-dated carries was unclear but after November's reduction "we will hopefully start to see that monthly roll business really become more active".

DEALER-TO-CLIENT PLATFORM

Consultation with the market due this year to gauge demand for a dealer-to-client platform. The LME will look at building such a platform itself or partner with another provider.

OTC FEE

Consultation with members on new fees for the use of LME prices in over-the-counter (OTC) transactions will be launched in the middle of November. It will detail what the exchange is proposing, how reporting of OTC trades will work and exemptions proposed.

"Many members have pointed out they will be working right up until the end of the year on MiFID II," Chamberlain said, referring to European regulation that comes into force on Jan. 1. "The delivery of the financial OTC booking fee might not be the first of January, but within the first few months."

TICK SIZE REVIEW

Review due to start before year end of the tick size, or minimum price fluctuation, of LME contracts and incentive schemes for traders as part of efforts to curb activity of algorithmic traders who have been criticised by some members.

A larger tick size would increase the risk to these traders of holding a position by increasing the minimum size of gains or losses on its sale.

FIRST HALF OF 2018

B SHARES

Provision of a mechanism to buy and sell B shares on the LME, which most members of the exchange are required to hold.

Chamberlain said the facility, which will later allow leasing of B shares, would enable existing members to monetise their excess shares and make it easier for prospective members to find and buy them.

INTRODUCING BROKERS

Consultation on giving membership status to introducing brokers (IBs), who feed business to LME members but do not themselves execute trades on the LME.

"We believe that the role of IBs is absolutely crucial in building out our new products," Chamberlain said.

T2 BOOKING

To ease access to the LME for electronic and fund traders, the LME will give them the option to trade directly on the exchange. Under the current T4 booking model, they must trade through a member.

SECOND HALF 2018

LMESELECT

Introduction of implied pricing - or prices for contracts extrapolated from trading activity on other dates - for industrial metals to boost liquidity. Trade-at-settlement to allow buying and selling at settlement prices created electronically from trading on the exchange.

The LME already generates these prices for gold and silver and will begin to create tradeable electronic closing prices for industrial metals alongside the open outcry ring.

WARRANT COLLATERAL

Make changes to make it easier to use LME warrants as collateral to cover initial margins - the amount of cash investors need to set aside to meet settlement obligations in case of default - instead of cash.

NEW PRODUCTS

Launch of new hot rolled coil contracts, gold and silver options, platinum and palladium futures contracts, an alumina contract and cash-settled aluminium premium contracts.

2019

NEW PRODUCTS

Contracts for cobalt sulphate, nickel sulphate and lithium carbonate or hydroxide - chemicals used in rechargeable batteries to power electric vehicles. Chamberlain said the LME aimed to launch these contracts simultaneously in mid-2019.

INITIAL MARGIN

Adoption of value-at-risk, or VaR, model to calculate initial margins. The LME expects VaR to reduce margin requirements.