LME issues discussion paper on future market structure
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The London Metal Exchange (LME) has issued a discussion paper on market structure, putting forward a set of proposals designed to enable the Exchange to modernise and adapt to emerging trends and evolving customer needs.
The proposals aim to achieve increased transparency and a structurally fairer and more efficient marketplace. They also take account of the rapidly increasing digitisation across commodity trading and the physical metals industry more broadly.
Matthew Chamberlain, LME chief executive, said: “As we set out in the 2017 Strategic Pathway, it is vital that the LME continues to adapt to serve its diverse trading community as effectively as possible. Three years on, it is clear that a desire for greater transparency and fairness, and increasing digitisation across commodities trading, require us to consider changes to some elements of the LME’s structure.
“The LME has an important role to play in responding to these trends, and we believe it is the right time to consider the future development of our market in order to secure its long-term sustainability and growth and maintain the highest standards in our broader ecosystem.”
The discussion paper considers several changes to the LME, which are focused on four main topics: the Ring and reference prices; enhancing liquidity in the market; the potential benefits of moving to a realised variation margin methodology; and the possible introduction of additional disclosures and policies to strengthen market conduct.
The discussion paper also identifies key features which the LME wishes to protect and maintain – such as its date structure – and this balance is reflective of the Exchange’s commitment to the principles set out in its 2017 Strategic Pathway: serving the physical market, ensuring fairness, increasing user choice and maximising trading efficiency.
The Ring and reference pricing
The LME believes it is the right time to consider the permanent closure of the Ring and a move to an electronic pricing structure. This shift is expected to benefit the market by broadening direct participation during the price discovery periods and increasing overall transparency.
Enhancing liquidity
The second set of proposals put forward are designed to bring greater liquidity to the central electronic venue, which is by nature the most transparent marketplace and enables the broadest participation. The proposals specifically focus on incentivising electronic trading on the member-to-member market.
Margin methodology
The move from a “discounted contingent variation margin” (CVM) methodology to one of “realised variation margin” (RVM) was first considered in the 2017 Strategic Pathway, where the decision was made to keep the potential change under ongoing review. This discussion paper highlights the increased focus on the regulatory capital costs associated with CVM and explores the potential benefits of moving to an RVM methodology, which include an increase in trading efficiency, greater standardisation and the removal of some barriers to entry to the LME’s market. However, the discussion paper also notes the central importance of credit provision in the LME ecosystem, and understands the view of many observers that such provision is easier under the current CVM structure.
Given the finely balanced nature of this debate, the discussion paper invites views on the relative merits of CVM and RVM, so that an appropriate roadmap can be developed.
Market conduct
Finally, the discussion paper considers the introduction of potential additional disclosures and policies to strengthen market conduct, such as in relation to stocks and the movement of physical metal. The discussion paper explores a regulatory news service for stock warranting or cancellations. It also considers some form of disclosure obligation for certain physical transactions, above a specific size, by those trading on the LME. The paper also explores regular reporting of OTC positions or rules to limit any one party’s ability to acquire significant holdings of new or remaining warrants.
Next steps
The LME invites feedback on all topics within the discussion paper from market participants and broader stakeholders from now until 19 March 2021. The LME aims to provide feedback and next steps before the end of the second quarter this year.
Gay Huey Evans OBE, LME Chairman, concluded: “The LME has a strong history of engagement with its market, and is committed to fully discussing these topics with all stakeholders before making any proposals on implementation. We encourage feedback from across our industry on our proposed path forward.”