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LME introduces comprehensive package of warehouse reforms

7 November 2013

  • Proposal modified to affect all warehouses with queues of more than 50 days
  • LME will act to prevent queue incentivisation
  • Detailed report of consultation published
  • Full-scale external logistical review planned for LME warehousing network
  • Related changes: new transparency reports, creation of Physical Market Committee, on-going commitment to best practice information barriers

The Board of the London Metal Exchange (LME) has approved the proposed changes to its warehousing policy designed to cut queues at warehouses, following a three-month consultation with the global metals industry. The LME has closely engaged with the FCA to ensure that the changes are consistent with the LME’s regulatory requirements.

 “As the world’s leading base metals exchange, the LME has a duty to the entire metals community to run a fair and orderly market. We had a responsibility to examine concerns raised about lengthy warehousing queues, as these pose a range of issues in terms of price discovery and price convergence as well as the use of the market for effective hedging,” said Garry Jones, Chief Executive of the LME.

“The LME wishes to thank all the individual companies and industry groups who made time to respond to the proposal. While the feedback we received over the three-month consultation period was varied and at times polarised, we believe that the amended proposal is, on balance, the best solution for all market users.

“Having carried out a rigorous and in-depth market engagement programme involving over 70 meetings and more than 30 written responses we now call on all market participants to move forward under these new rules, which we believe best balance the needs of all LME stakeholders.”

“We are publishing a detailed report of the warehouse consultation, which was the basis for the independent decisions reached by the LME,” said Matt Chamberlain, Head of Business Development at the LME.

“This report demonstrates the detailed nature of the consultation process. Participants will see how their feedback, including concerns around unintended consequences of the proposal and alternative solutions, has been considered by the LME in reaching this decision. While the report reveals a wide breadth of opinion, it is important for the market to understand the depth of the LME’s analytical efforts to arrive at an optimised set of market rules.”

Some modifications have been made to the proposal in accordance with market feedback. The initial proposal targeted warehouses with queues of more than 100 days, but as a result of the consultation the threshold has been reduced to 50 days, allowing the LME to better deliver a market of last resort to physical metals users.

Additionally, the LME will investigate and act to prevent warehouse companies unreasonably incentivising the formation of queues.

The proposal operates by measuring all of the metal loaded into a warehouse over a three-month period. If there is a queue of more than 50 calendar days the affected warehouse would be expected to deliver out additional metal based on a formula.

For example, a warehouse currently required to deliver out a daily tonnage of 3,000 tonnes would, under the proposal, need to load out at least 1,500 tonnes per day more than it loads in. Additionally, if the current load-in rate of an affected warehouse exceeds the minimum load-out rate, then the warehouse would be required to deliver out tonnage equal to that excess.

The LME has also agreed to further enhance the existing physical network in a number of ways. The LME will commission a full external logistical review of LME warehousing to address issues raised regarding reasonable operational expectations and requirements, and also to review its warehousing agreement.

In addition, the LME will create a new Physical Market Committee to provide the physical community with enhanced representation in the LME’s governance structures. The LME’s warehousing system will continue to be reviewed every six months and the new committee will play a substantial role in this process.

Alongside these measures, the LME has committed to reaffirm its policy on information barriers by informing the market on an annual basis once it has received the third party audits carried out on warehouse operators who are required to have information barriers in place, and identifying any general issues that may arise from this process. The LME also plans to investigate the viability of introducing products linked to premium price discovery and hedging, although such products are seen as complementary to the new policy targeting queues.

The LME intends to provide new delayed data on a per-warehouse basis and, separately, to look at publishing a “commitment of traders” report in response to market demand.

While the implementation of certain elements of the new rules will require further discussion with warehouse companies in accordance with the terms of the warehouse agreement, it is not anticipated that this will delay implementation as planned on 1 April 2014.

The LME will update the market about the additional proposals and reviews as and when further progress has been made.

Notes to editors

The related documents referred to in this release can be found here:  

Contact details

For further information or to speak to an LME spokesperson, please contact:

Miriam Heywood
+44 (0)207 113 8538

Bianca Blake
+44 (0)207 113 8534

About the London Metal Exchange

The London Metal Exchange, a member of HKEX Group, is the world centre for industrial metals trading.

The majority of global non-ferrous metals business is conducted on our three trading platforms: LMEselect (electronic), the Ring (open outcry) and the 24-hour telephone market. The world’s metal community uses the LME to trade futures and options, and to hedge against adverse price movements. Prices that are discovered on our markets are used as the global reference prices.

Participants can trade aluminium, aluminium alloycopper, tin, nickel, zinc, lead, molybdenum, cobalt, steel billet, steel rebar and steel scrap, and four regional aluminium premiums contracts. In 2016, 156.5 million lots were traded on the LME, the equivalent of 3.5 billion tonnes and $10.3 trillion in notional value.

At the close of the year, approximately 3.6 million tonnes of material was held on LME warrant in more than 600 storage facilities across 34 locations internationally.