- Discussion paper contains proposals to further enhance the attractiveness of LME warehousing, while maintaining commitment to protections against structural queues
- Core delivery functions of the warehouse network are operating effectively; however, LME recognises that many market stakeholders wish to see greater on-warrant stocks
- A number of the potential reforms have been proposed by members of the LME Warehousing Committee, who have put forward their ideas to the LME; other reforms have been proposed by the LME
The London Metal Exchange (LME) is today launching a discussion paper and market-wide engagement process, setting out proposals from the LME Warehousing Committee designed to enhance the efficiency of the LME warehousing network, and create further opportunities for metal owners to make use of LME warranting.
Since 2013, the Exchange has led an ongoing warehouse reform process, aimed at tackling structural warehouse queues, and ensuring that the warehouse network meets its core role of settlement and price convergence for LME contracts. The Exchange is confident that this delivery function operates effectively, and current stock levels are more than sufficient to facilitate the daily settlement of its forward market.
However, the LME is also aware that LME warranting is used more broadly by metals market participants seeking to store and finance metal, many of who believe that liquidity and transparency would be enhanced by higher stock levels. In addition, warehouse companies have asked the LME to consider changes to its rules in order to enhance usage of the network.
As a result, the LME tasked its Warehousing Committee with identifying proposed modifications and potential proposals. The LME has compiled these proposals into a discussion paper and is now seeking market-wide feedback.
Commenting on today’s announcement, Matthew Chamberlain, LME CEO, said: “The LME is committed to ensuring the smooth and orderly operation of its physical delivery function. However, if our industry can collectively identify rule modifications which enhance the attractiveness of the LME warehouse network while retaining appropriate protections for physical market participants who receive warrants in LME settlement, then the LME will facilitate such changes."
The discussion paper covers nine specific proposals, in three categories:
I. The Warehouse Committee’s strategic proposals to enhance the attractiveness of LME warehousing services:
- A change to Queue-Based Rent Capping (“QBRC”) parameters, whereby rent would become free after metal has remained in a queue for 80 days (compared to the current structure where half-rent is charged after 30 days, and rent becomes free after 50 days). Some warehouse operators believe that this may enable them to attract and incentivise larger quantities of stock into LME storage, while still providing protection for metal owners against structural queues
- Limitations on evergreen rent deals (evergreen rent deals are arrangements whereby metal owners retain an interest in warehouse rent on warrants which they have previously sold). Some warehouse operators believe that this may reduce the practice of metal being withdrawn from warehouses purely to end these evergreen payments
- A possible reduction in headline warehouse charges. Some warehouse operators believe that a reduction in headline warehouse charges will incentivise greater use of the LME network by logistically-focused metal owners
II. The Warehouse Committee’s operational proposals to make LME warehousing more efficient:
- Market-wide adoption of electronic certificates of analysis, so that relevant documentation can be more easily provided to those taking receipt of metal in LME warehouses
- Clarification on whether warehouse operators loading-out more than the minimum requirements may apply different rules to the additional load-out. Some warehouse operators believe that this may provide greater operational flexibility to clients
- Denomination of free-on-truck charges in US dollars, rather than the current model of local currency
III. Additional proposals put forward by the LME to enhance market transparency, where the Exchange has taken the opportunity presented by this discussion paper to seek market views on three further topics which have arisen in conversations with the market:
- Eligible stock reporting, whereby stocks of unwarranted metal in LME-registered sheds would be publicly reported, hence enhancing market transparency as to total global metal stocks
- A possible change to stock reporting, which could reduce the potential for market participants to cancel and then re-warrant stock purely for the purposes of influencing LME stock reports
- A stipulation that copper cathode can only be warranted if it bears a unique and indelible identification label, allowing more reliable traceability of copper back to its producer
Fabian Somerville-Cotton, Chairman of the LME Warehousing Committee commented: “I am pleased with the cooperative manner in which the LME Warehousing Committee has produced this set of proposals. While not every warehouse company supports every proposal, the overall package being presented to the market is a clear sign of the desire of LME-listed warehouse operators to work with the Exchange and the broader market to evolve our network."
The discussion paper is open until 31 May 2019 and all responses will be considered confidentially by the LME. The LME will then consider the feedback and advance certain proposals, if appropriate, to a full consultation stage.