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 New methodology aims to bring greater determinism, transparency and standardisation to the Closing Price discovery process.
 Extending the use of VWAPs in Closing Price methodology for most liquid contracts.
 Existing methodology to remain in place for other contracts.
 Phased implementation from January 2024 to ensure participant readiness.

The London Metal Exchange (LME) is pleased to announce that, following a market-wide consultation, it will introduce a phased roll-out of an evolved Closing Price methodology to its most liquid contracts, designed to bring more determinism, transparency and standardisation to the Closing Price discovery process.  

LME CEO, Matthew Chamberlain, commented: “Our pricing evolution journey began in 2021, when we adopted the current approach of discovering our lunchtime Official Prices (used mainly by the physical industry) in the LME Ring, and our afternoon Closing Prices (used more by financial participants) on our electronic LMEselect platform. This division has worked well, and allows us to further evolve our Closing Price methodology – a key request from many of our financial market users – while maintaining Ring-based Official Price discovery. The enhancements we are now making to the Closing Price process – which introduce greater transparency and bring the methodology further in line with the industry standard – also support our overarching aims set out in our Action Plan to modernise and strengthen LME markets to ensure they thrive in the long-term. We appreciate that this evolution will impact the way market participants access and interact with LME price discovery – particularly in respect of members guaranteeing Closing Prices to their clients – and, in response to market feedback, we will now be phasing in the implementation from January 2024 to ensure participants have adequate time to prepare for the changes.” 

Currently, the LME electronic Closing Prices use a volume-weighted average price (VWAP) for the most liquid 3-month contract, and a “last price” methodology (combined with expert judgement from the LME’s Trading Operations Team) for all other prompt dates.  

Going forwards, the LME will extend the VWAP methodology to five additional prompt dates (Cash and the first four 3rd Wednesday monthly dates), for aluminium, copper, zinc, lead and nickel. The VWAP methodology will calculate the average price of trades over the 5-minute pricing window according to the volume of contracts traded. Therefore, the Closing Price will represent all of the trades that take place over the pricing window, with each trade’s influence on the price being proportionate to its size. If the 5-lot minimum volume requirement (MVR) is not met, the price will be calculated instead using a time-weighted average price (TWAP) over the pricing window. 

Jamie Turner, LME Interim COO, commented: “The new methodology builds on the existing VWAP process we already have in place for all 3-month contracts, and expands the number of contracts using the methodology at the front of the price curve. As well as increased transparency and operational efficiencies, this evolution will bring greater certainty to the price discovery process. All in-scope trades that take place over the pricing period will influence price determination in a predictable and objective way. We believe this strengthens the process as it encourages participation and liquidity over the whole pricing period. Additionally, it brings the LME’s pricing methodology more in-line with other commodity markets, which we know is desirable for many of our users.”

For all other prompt dates and metals, the current Closing Price discovery method will remain in place. The LME believes this hybrid pricing approach, which is also adopted in peer markets, caters to the complexity of the LME prompt date structure. 

A number of respondents to the consultation noted their desire for trade-at-settlement (TAS) contracts to be implemented alongside the VWAP methodology. While TAS is not, in the LME’s view, a prerequisite for the new methodology, the LME plans to introduce TAS functionality for 3-month contracts alongside the launch of its new trading platform in 2024, and will continue to review the possibility of further expanding this functionality. 

Following respondents’ feedback, the LME has also amended various details of the proposed methodology, including increasing the MVR to 5 lots and adjusting its approach to rounding. 
Based on market requests for a longer implementation pathway, the first contracts to adopt the new methodology from 22 January 2024 will be aluminium and lead, with copper, zinc and nickel to follow on 18 March 2024. 

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Notes to editors

Contact us

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

Miriam Heywood
miriam.heywood@lme.com

Andrea Blumire
andrea.blumire@lme.com