LME consults on financial OTC booking fee and enhanced trading regulations in support of market fairness

22 November 2017 

  • Financial OTC booking fee intended to rebalance current fee disparity
  • Fee waivers, offsets and discounts proposed based on market feedback
  • New rules in respect of third-party platforms to support LME pricing and liquidity
  • Technical rules to protect LME pricing and data integrity

The London Metal Exchange (LME) today issued a market-wide consultation regarding the introduction of an over-the-counter (OTC) booking fee for financial participants and new trading regulations for contract creation and execution.

Financial OTC booking fee
As set out in the LME’s strategic pathway, the aim of the financial OTC booking fee proposal is to rebalance the current disparity between the fees paid by members servicing their clients with an LME client contract and those servicing their clients with an OTC contract based on LME prices at a substantially reduced fee. In addition, it aims to provide a fair payment to the LME for the use of the intellectual property in its prices. The current fee model is illustrated below:

The new proposed fee would be $1.00 per equivalent LME lot – corresponding, for instance, to 4 cents per tonne in respect of aluminium or copper – to be paid by financial institutions for each OTC trade executed in place of an LME client contract. The LME is also proposing to provide a set of waivers, offsets and discounts, which would significantly reduce the total financial OTC booking fee payable by many participants, and is intended to address feedback already received from the market.

Matthew Chamberlain, LME CEO, commented: “We have spoken extensively with the market about the introduction of the new fee, and many members welcome the proposal in bringing fairness to the LME market. We have already worked to address the concerns raised by others through proposing various waivers, offsets and discounts. Overall, we are confident that the proposals represent the right steps in bringing greater fairness to the market, and compensating the LME for the services it provides to the industry.”

The financial OTC booking fee would be payable by financial intermediaries (members and non-members), but would not be directly payable by physical participants or investment funds. Although banks and brokers may choose to pass on fees to physical clients (in, for example, hedging spreads), the LME’s discussions with the physical market suggest that this should not be unduly burdensome.

The LME has today published a “Quick Guide to the Financial OTC Booking Fee”, which provides a helpful reference for all market participants to understand what, if anything, they would need to do in respect of the new fee.

Third-party platforms
Since many OTC contracts are created on third-party platforms, the LME is also proposing new rules – in the context of the financial OTC booking fee – regarding the use of its data in contracts transacted on such platforms. Based on discussions with stakeholders, it is clear that the “single-dealer” platforms provided by members represent a valuable service for the market, and are therefore a key element of the LME ecosystem. In particular, the LME confirms the right of members to make use of LME prices in the execution of trades on their own automated platforms and to book the resulting trades onto LME systems.

However, as noted in the LME’s strategic pathway, certain market participants have voiced concerns that the unchecked use of LME data and facilities by third-party “multi-dealer” platforms could fragment liquidity and threaten the LME’s commercial interests. Accordingly, should a multi-dealer platform wish to use LME data or book contracts via LME systems, they should hold the appropriate approvals from the Exchange. The LME is mindful of the fact that its members may wish to utilise third-party platforms which lawfully make use of LME intellectual property or systems, for example, a venue to which the LME licenses prices, or a venue utilising LME intellectual property or infrastructure by means of an open-access arrangement. The proposal includes wording intended to facilitate this.

Adrian Farnham, LME Clear CEO, said: “The LME recognises the significant role which many third-party platforms play in our market – most notably, members’ single dealer-to-client facilities. We have stated that we would be pleased to work with other platforms where our stakeholders indicate that they are supportive, or where open-access rules apply. However, we must also protect the liquidity of our market and the commercial interests of our Exchange by setting out clear and fair rules, so that all members and clients observe the same standards in supporting centralised price discovery and trade transparency.”

Technical trading rules
Finally, the LME is proposing a set of technical rules to protect the integrity of its trading venues and data. These comprise:

  • a requirement for inter-office trades to be processed on a gross basis, so that the industry benefits from a clear post-trade view of activity in the market
  • a requirement for all electronic orders to be transmitted to the LME’s electronic trading system – LMEselect – rather than being internally “crossed-up”, so that the market benefits from a fully liquid and transparent order book
  • new provisions in the rulebook clarifying the onward distribution of data by members to their clients – including a requirement for financial clients to pay the financial OTC booking fee where appropriate

The LME is intending to issue a consultation decision notice in early February 2018. Subject to the consultation, the financial OTC booking fee is proposed to take effect from 3 April 2018. This date has been moved back from the original proposal of January 2018, given feedback from members that it would not be possible to implement the fee at the same time as MiFID II preparations. All other proposed rule changes would come into effect shortly after the issuance of the decision notice.

~Ends~

Notes to editors 

  • A “single-dealer” platform refers to an electronic trading network offered by one member to its clients.
  • A “multi-dealer” platform refers to an electronic trading network where multiple dealers offer prices to a selection of clients.

Contact details

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

Miriam Heywood
Tel: +44 (0)207 113 8538
Email

Bianca Blake
Tel: +44 (0)207 113 8534
Email