The extensions were introduced on Monday 29 September. High-grade primary aluminium and copper grade A contracts now extend to 123 months (ten years) from 63 months; special-high-grade zinc and primary nickel trade out to 63 months (five years) from 27 months; and standard lead moves outwards to 63 months (five years) from 15 months.

Official and unofficial prices remain unchanged, but a new 27-month reference price for standard lead can now be referenced.

“The decision to extend prompt dates comes in response to demand from both the physical and investment markets. Our research has shown there is significant business in the OTC market that extends beyond the current prompt dates of the LME contracts and there is now an opportunity to move that business onto the Exchange,” explains LME's business manager, corporate affairs and marketing, Thom Lant.

In addition, a number of major banks, which trade long-dated OTC contracts with clients and each other, have to reserve considerable capital against such trades. Listing the trades will reduce capital requirements, which is considered particularly beneficial in the current economic climate.

“The concept is primarily designed to provide an alternative to the OTC element of long-term trading and put such trades on exchange,” explains Michael Overlander, chief executive and managing director of Ring-dealing member, Sucden.

There is a further benefit as well. By bringing these trades onto the Exchange, the counterparty risk traditionally associated with OTC trades is removed, as it is transferred to the clearing house, LCH.Clearnet.

“The timing is quite pertinent given the growing concerns over counterparty risk, which has become more prevalent across all markets,” says Overlander.

The addition of new prompt dates provides a range of other benefits, too.

“Currently, some of our most liquid dates, aside from the three-month contracts, are those at the very furthest end of the curve. Extending the prompts will provide participants with all the benefits of an exchange-traded contract such as price transparency, the management of counterparty credit risk through clearing and the ability to manage price risk over longer periods of time to meet their requirements,” says Lant.

Members have been quick to applaud the move.

“From our perspective, as a company which undertakes less OTC business than exchange-traded business, we are happy to see these long-dated trades move over to the LME,” says Overlander.

End-users and producers will also benefit from extended prompt dates. Many companies, which buy out to ten years, currently find it difficult to value their materials on a mark-to-market basis. That situation should now improve considerably. In addition, companies developing raw material ventures will be able to price their eventual products more accurately.

“By the very nature of the physical market, much of the financing in metals is over a long period, to finance the development of mines or smelters, for example. The introduction of longer-dated contracts will improve the management of risk for such projects,” says Lant.

As yet, the Exchange has no plans to extend its prompt dates for traded options and traded average price options contracts. Prompt dates for the tin, aluminium alloy, North American special aluminium alloy, plastics, steel, cleared average price swaps, index and LMEmini-contracts remain unchanged as well.

Paul Francis-Gray
LME Ringsider enewsletter
Autumn 2008