Historically, steel derivatives markets have developed in a different way than derivatives markets for base metals. Ferrous derivatives have seen execution-only brokers (Introducing Brokers or IBs) rise to take a prominent role in the industry. The LME acknowledges and recognises this market development and has clarified how these brokers can become active participants in the new LME Steel Scrap and LME Steel Rebar contracts.
How does it work?
Once an IB arranges a trade between two counterparties (Client A and Client B) at an agreed price, the IB needs to communicate the details of the arranged trade to the clearer of each counterparty (Clearing Member A and Clearing Member B).
At a minimum this communication should include:
It is then the clearing member’s’ duty to input the respective trade halves into the LMEsmart system so that the trades can be matched and cleared.
To preserve the anonymity of the counterparties, IBs are not required to disclose to the clearing members the identity of their respective counterparty to the trade. For example, in the diagram above, Clearing Member A will only be notified of the identities of Client A and Clearing Member B, and will not learn the identity of Client B. Symmetrically, Clearing Member B will only be notified of the identities of Client B and Clearing Member A, and will not learn the identity of Client A.
The trade structure illustrated above is only one simple example of how IBs can be involved in trades on the LME and is shown here for clarification purposes only. A number of other structures may be possible, including for example:
However, the structure shown in the diagram ensures that counterparty anonymity may be maintained under a variety of scenarios.