The LME Group Initiates Changes
The LME Group, comprising of London Metal Exchange and LME Clear, has recently initiated two market consultations seeking to identify what additional pricing and inventory transparency measures could be instituted.
“The proposals are designed to bring greater visibility of unwarranted metal stocks, make permanent existing controls around the management of low stock environments, and enhance the transparency and determinism of the closing price discovery process by expanding the use of volume-weighted average prices (VWAP) in the LME’s methodology,” the LME explains.
Under its Group Action Plan, the LME has emphasized that greater transparency and increased reporting of metal stocks held in its warehouses is “important in ensuring ongoing confidence in the operation of the LME’s market.”
“These consultations represent our first formal market-wide engagement on the initiatives laid out in our action plan earlier this year,” CEO Matthew Chamberlain states. “The plan and the proposals presented today are ultimately designed to ensure the long-term health and efficiency of LME markets and to support the trading community in building deep, resilient liquidity for the benefit of all our users.”
Nickel Market Anomaly
An unexpected pricing fluctuation occurred within nickel markets in March of 2021, in response to this anomaly, the LME took action.
The LME is considering expanding its off-warrant stock reporting requirements, which have been active since 2020. This proposal intends to cover all unwarranted metal within LME-licensed warehouses that may be warranted in the future. This would establish more visibility of the stockpiles of warrantable material stored in the warehouses, according to the exchange.
Recognizing that different market participants have varying views on transparency, the LME says it considers both concerns for confidential data and preference for increased openness. Most users are in favor of more visibility within the industry, believing it promotes stability overall.
An alternate proposal looks to introduce regulations that would enable the long-term implementation of the temporary measures taken last year, with an aim to reduce any possibility of negative consequences connected to low stock levels and amplify the authority held by the LME Group regarding its “deferral powers.”
These controls would limit the occurrence of backwardation in “tomorrow or next day” contracts, as well as a delivery deferral mechanism which the organization views as “effective and important controls when metal stocks are low, ensuring that distortions are not caused by short-term delivery challenges.”
A Secondary Consultation System
Following an extensive consultation process, the LME has put forward a more predictable and industry-standard closing price methodology. This new system was originally proposed in response to findings from 2021’s Discussion Paper on Market Structure.
“With input from the LME’s 2021 Closing Price working group (with representatives from a broad range of market participants) as well as the LME User Committee, the LME now proposes to expand its existing VWAP [volume-weighted average price] methodology to include cash, three-month and the first four third-Wednesday monthly contracts in aluminum, copper, lead, nickel and zinc,” the exchange notes.
“The User Committee wholly supports the important work the LME is doing to strengthen and enhance its markets,” the chair of the LME User Committee, Gavin Prentice states. “While there are a range of views on the proposals presented today in respect of the closing price determination process, overall the committee agreed that the proposed pricing blueprint represents the appropriate path forward as the LME looks to evolve the pricing methodology.”
According to the LME, the proposed change may well have an influence on certain members’ capability to make available certain closing price orders for clients. Yet, it holds that this new pricing system provides an appropriate equilibrium in presenting a more exact method for stabilizing liquid instruments at the front of the curve.
The LME Group is seeking opinions from all industry experts regarding its proposed initiatives. All inputs must be provided before either June 30 or July 14, depending on which proposal is being discussed.
“We can only achieve these aims by working together with our users and we would therefore encourage market participants to provide their feedback on the proposals put forward today,” Chamberlain concludes.
