- Strategic principles: to serve the physical market, ensure fairness, increase user choice, and maximise trading efficiency
- LME to reduce fees for short- and medium-dated carries
- Financial OTC fee intended to be introduced from 2018 for dealer trades using LME prices
- Future developments will include: greater opportunities for client business; optimised initial margin methodologies and asset mobilisation; encouraging only responsible algorithmic trading
The London Metal Exchange and LME Clear (together, the LME) today set out their strategic pathway following a comprehensive period of engagement with their users.
The LME received 162 responses to its discussion paper on market structure from a broad range of users, whose feedback was instrumental to the formulation of the LME’s strategic pathway.
Matthew Chamberlain, London Metal Exchange Chief Executive, said: “We are delighted that so many members of the metals community took the time to respond in detail to the discussion paper. Respondents’ views were aligned in a number of areas, which helped us to refine our strategic priorities, resulting in a plan that balances the needs of all our users in support of fairness, user choice and trading efficiency, while strengthening our roots in the physical market.”
The LME will reduce carry fees and intends to introduce a new financial OTC fee with effect from 1 January 2018 to ensure fairness in LME fee structures.
To support its physical user base and further encourage use of the daily date structure – including tom-next and monthly rolls – the LME is substantially reducing short- and medium-dated carry fees. Effective from 1 October 2017, short-dated carries executed by members on the Ring and LMEselect will be reduced to $0.15 and $0.25 respectively, with inter-office and basis trades discounted to $0.35. These levels are lower than those in force in 2011, prior to increases in third-party clearing fees and LME commercialisation. Client contracts for short-dated carries will be reduced to $0.25.
From 1 November 2017, a new fee category of medium-dated carry trades – where all legs fall within 35 calendar days forward from the closest prompt date – will be introduced. Trades in this category executed by members on the Ring and LMEselect will be reduced to $0.25 and $0.45 respectively, with inter-office trades discounted to $0.70. Member-to-member basis trades and all client contracts in this category will be reduced to $0.45.
Gonzalo Cuadra, Chairman of the LME User Committee, commented: “I am pleased to note the strong cooperation between the LME Executive and the LME User Committee, specifically on the subject of the discounts. I believe that the collective experience of the User Committee's practitioners has been very helpful for the LME in optimally calibrating these fee discounts. The Exchange and its key members and users are now aligned in their common desire to see volumes and liquidity grow for the benefit of all market stakeholders.”
From 1 January 2018, the LME intends to introduce a fair booking fee for dealers issuing OTC client contracts that reference LME prices. This would seek to rebalance the current disparity in fees between members offering their customers LME client contracts, and those offering OTC contracts based on LME prices at a substantially reduced fee.
Longer term developments
The LME does not plan to make any changes in respect of those features which are crucial to its physical market – for example, its daily date structure. However, where user choice can be enhanced and trading efficiency maximised without impacting such features, the LME has also scoped out a number of key changes intended to take place over a longer period of time.
The LME will seek to provide greater opportunities for client business by providing a broader range of execution and clearing services, which could include initiatives such as flexible client clearing, an optional T2 booking model and a separate dealer-to-client platform. In addition, and as part of its commitment to user choice, the LME intends to upgrade LMEselect with the provision of implied pricing, working with members to enable electronic access to 3rd Wednesday trading for those clients who wish it.
With a view to reducing initial margin levels, the LME intends to transition to a Value-at-Risk (VaR) model, and introduce an optional gross client omnibus account (GROSA) which will allow the LME to apply a lower margin methodology. In addition the LME will look to enhance its warrants-as-collateral service and investigate other collateral transformation tools to protect users in the event of future pressure – be that regulatory or risk-based – to transition to a Realised Variation Margin (RVM) model.
To support responsible algorithmic trading while discouraging behaviour which does not add to the market, the LME will consider infrastructure changes such as increased tick sizes, designed to encourage liquidity-additive behaviour and strengthen the relationship between the LME’s key stakeholder groups. The LME also intends to enhance access to its market, while respecting its current membership structure, by creating a new membership category for introducing brokers. This will assist the LME to further expand its range of successful new precious and ferrous contracts.
Adrian Farnham, LME Clear CEO, commented: “This exciting and ambitious strategic pathway – including both the short term actions and longer term infrastructural changes – will serve to strengthen our position as the global hub for metals trading and clearing, and we believe it will propel the Exchange, the Clearing House and the market as a whole into a new phase of growth.”
Notes to editors
- All fees are stated per leg, per lot, per side.
- Short-dated carries are defined as carries where all carry dates are between the TOM date (next LME prompt date) and 15 calendar days forward from the TOM date inclusive.
- Please note that the LME may undertake further consultation with members in respect of specific proposals, in accordance with its usual consultation processes and applicable rules.
- Certain proposals may also be subject to regulatory approval.