LONDON: London Metal Exchange, the world’s biggest industrial metals market, heads into LME Week on Monday fresh from a legal victory that enables reform of its warehousing system and winning a foothold in benchmarking precious metals.
But those two successes alone will not ensure that the $2.2bn deal by Hong Kong Exchanges and Clearing Ltd (HKEx) in 2012 to acquire the 137-year old exchange will pay off.
To churn out profits, the LME plans to attract more financial investors such as hedge funds and expand its tentacles into mainland China, which for now remains elusive.
Fund managers, who are not interested in hedging physical metal, want a more standardised way to trade LME contracts to ensure that they can buy and sell large amounts easily.
The LME is currently working behind the scenes to find ways to funnel more liquidity into a particular expiration date each month, two industry sources told Reuters.
“The LME is planning a win-win deal to attract new financial investors by making it easier to invest in one date (per month), while leaving in place the attractions of the physical market,” said one of the sources with direct knowledge of the LME plans.
As part of a strategy of expanding into China, the LME plans to add the Chinese currency as collateral for clearing of metals contracts by year’s end and to expand its network of certified metals warehouses on the mainland in the next few years. The exchange hopes the new initiatives will gain momentum after its string of recent successes, which came just ahead of LME Week, the global industry’s largest annual gathering.
This week the LME won the right to take charge of London’s platinum and palladium pricing benchmarks, a stunning comeback after it failed to secure administration of the silver price.
The exchange also prevailed earlier this month in a legal showdown with Russian aluminium giant Rusal, allowing it to implement a sweeping reform of its global warehouses.
The LME, Europe’s only financial market that still uses open outcry trading, accounts for about 80 percent of overall global futures and options trade in base metals.
Miners and industrial users love its flexible set-up, which allows them to lock in prices on any day for a three-month period.
But having hundreds of possible expiration dates is a nightmare for fund managers, who want to trade a standardised contract electronically.
The exchange has been losing business to US rival CME , which offers monthly Comex copper contracts with fixed expiration dates. “Many risk managers at hedge funds are worried that there’s not enough liquidity in some LME dates and veto investments (on the LME),” the source said.
The LME is soon to announce a plan to boost the liquidity of contracts that expire on one date each month — its so-called “Third Wednesday” — by making it easier for brokers to make bid/ask quotes for that date, the source said.
The exchange currently imposes a fixed ratio on a broker’s number of orders relative to its trades, a rule designed to curb abuses by high-frequency traders, but this is due to be tweaked, one of the sources said.
Another senior industry source said the proposal has been floated at the LME’s working groups but cautioned that the exchange needed to tread carefully.
“We don’t want the LME to turn into Comex, where 99.7 percent of trade is electronic,” the source said. “We’re a physical market, and we’ve warned the management that we need to stay a physical market.”
Reuters
