- Daily price limits made permanent, with indicative revised limits of 12% for copper and aluminium.
- Fast-track listing approach for LME Nickel introduced, with coarse nickel powder considered as a potential deliverable shape.
- China-based Class II nickel spot market offering to be developed on QME.
- Assessment of scope for rebalancing of initial margin, concentration margin and default fund.
- Consultation planned for May 2023 on eligible stock reporting and measures to address low-stock environments.
- Market structure modernisation to continue, starting with Closing Price methodology evolution.
The London Metal Exchange (LME) and LME Clear (together, LME Group) are today pleased to announce a two-year programme of change to strengthen and enhance its markets. The action plan addresses recommendations put forward in the Oliver Wyman report, following events in the nickel market in 2022, and aims to:
- Embed the findings of independent, internal, and regulatory-led reviews to manage risk through enhanced controls;
- Enable the market to provide deep and resilient liquidity for LME participants and members;
- Build confidence in the reliable and transparent operation and governance of the LME Group’s markets; and
- Evolve market structure, demonstrating the Group’s ability to deliver modernisation and change
Matthew Chamberlain, LME CEO, commented: “The actions we have taken since March 2022 and those we have set out in today’s announcement are vital in building confidence in LME Nickel and to ensuring the long-term health and efficiency of LME markets more broadly. We remain fully committed to supporting the trading community as we drive forward initiatives to build deep resilient liquidity across our markets, and we look forward to working with our stakeholders to deliver these enhancements.”
James Cressy, LME Clear Interim CEO, said: “In addition to laying out plans to support LME Clear resilience, we are also today reconfirming our commitment to evolving the Group’s market structure, which we continue to believe is key to ensuring we remain responsive to emerging risks and customer needs. Prioritising transparency and maximising trading and clearing efficiencies are crucial in driving greater liquidity for the benefit of the market as a whole.”
Since March 2022, the LME has taken a series of steps to enhance market resilience, including the introduction of weekly OTC position reporting, which has improved the Exchange’s holistic visibility of OTC and exchange activity, and daily price limits. The LME has also enhanced a number of policies and risk controls to support the implementation of these steps.
The LME is pleased to confirm that its daily price limits are now a permanent feature of its market and, following feedback from the LME User Committee, the Exchange has undertaken a detailed study to provide a granular per-metal calibration of its daily price limits, which was published today. The application of the new calibration methodology provides illustrative revised limits for copper and aluminium of 12%. The LME intends to implement this methodology by the end of Q2 2023, and will communicate further details with the market in due course.
The LME is committed to rebuilding liquidity in LME Nickel, and alongside reopening Asian hours nickel trading earlier this week, is today introducing a fast-track listing approach and fee waiver for new LME Nickel brands – without relaxing the LME’s metallurgical or responsible sourcing standards – with the aim of bringing more stock and liquidity to the contract.
The LME Group acknowledges market concerns regarding the levels of margin charged against the LME nickel contract. LME Clear is working with key stakeholders to assess the scope for methodology changes (which will also allow an optimal balance between the allocation of risk across the default fund, initial margin and concentration margin), and will seek the required regulatory approvals in due course.
In order to increase the amount of nickel Class I material eligible for delivery, the Exchange will consider broadening its nickel contract to include coarse nickel powder (which is favoured in the production of batteries as it can be readily converted into nickel sulphate). The LME will finalise its position on this matter following the LME Nickel Committee meeting in April 2023, including consideration of acceptability to consumers, handling and security.
The LME also recognises that an alternative pricing solution aimed specifically at the rapidly expanding Class II nickel market could prove useful to some market participants. Having considered the viability of the various potential approaches, the LME will work with its Group affiliate, the Qianhai Mercantile Exchange (QME) to develop a China-based spot market offering for nickel sulphate and nickel matte, which could support these trade flows in Asia. The LME additionally remains open to introducing Class II contracts to complement LME Nickel as the underlying markets evolve.
Many of the measures included in the action plan will first require consultation prior to implementation. The first such consultation is planned for publication during May 2023 and will put forward proposals to make permanent the temporary measures introduced in 2022 to address the current low-stock environment and will also propose the introduction of monthly reporting of eligible stock (non-LME warranted metal in LME-licensed warehouses).
Market modernisation and other measures
Recommendations from the Oliver Wyman report underline the importance of providing clarity in respect of the Group’s vision of its future market structure and where possible of delivering greater standardisation compared with global peers. The LME’s 2021 Discussion Paper on Market Structure – which set out a series of initiatives designed to enhance the LME’s electronic offering, grow liquidity, increase transparency, and broaden participation – provided such clarity.
The LME will now return to these plans with an immediate focus on continuing to evolve the Closing Price process into a more deterministic and industry-standard methodology, with key input from the LME User Committee.
The LME will engage with the market later this year in respect of further enhancements to build electronic liquidity, including structural and incentive-based measures. Such measures will be supported and complemented by the delivery of the new trading platform – LMEselect v10 – due to launch in Q2 2024, which will provide a low latency, deterministic trading platform with a host of benefits that will encourage electronic liquidity.
LME Clear remains committed to the full implementation of its value-at-risk (VaR) initial margin methodology – widely considered by market participants to be a more accurate and responsive measurement of the risk of a portfolio. Having already implemented this methodology as an internal risk modelling solution, LME Clear will now proceed to convert its full operations to VaR and will work with the market to identify the optimal timeline for implementation.
The LME has completed its analysis of a potential hybrid variation margin model and concluded that such a model is not feasible due to the high level of complexity involved. The LME will now assess whether a transition to a realised variation margin (RVM) model in the medium-term would be appropriate, taking into account the LME Clear platform refresh scheduled for 2028. The LME Group will engage further with the market on this topic to establish the client impact and dependencies on other clearing structures and systems.
Beyond the initiatives mentioned here, the action plan also includes a range of other measures and considerations, such as the further identification of market distortion risks; additional initiatives around OTC position and trade reporting; reviewing and enhancing LME Clear membership requirements, horizon scanning, liquidity monitoring and reverse stress testing; and the potential enhancements to the gross omnibus segregated account (GOSA) offering. The LME Group will engage with the market on these and other actions and will provide further communications on progress over the course of the next two years.
Notes to editors
- Measures included in the action plan may be subject to consultation and/or regulatory non-objection.
- Find out more about the action plan and read related documents.
- Read the Oliver Wyman independent nickel market review documents.