* LME Clear hoped to introduce cuts to initial margins last
* Average Jan copper volumes down 12 pct on LME, up 22 pct
* Cuts in margins could make LME more competitive with U.S.
By Eric Onstad
LONDON, March 28 Regulatory delays to a proposal
to slash initial clearing margins by the London Metal Exchange
has dealt another blow to the exchange's ability to fend off
competition from U.S. rival CME Group, whose margins are
The LME, fighting declining volumes and complaints from its
members about higher trading fees, has seen steep losses to the
CME in the copper market early this year.
In January alone the average daily volume (ADV) for CME
copper futures contracts surged by 22 percent while the ADV for
LME copper lots slid by 12 percent.
The LME is the world's oldest market for industrial metals
and still hosts the majority of trading but has seen its
dominance eroded in recent years.
There are a host of reasons why speculators have gravitated
to the CME in copper, including a more complex futures market
structure at the LME, but initial margins is a major one,
brokers and industry sources said.
Customers trading on financial exchanges have to put down an
initial margin, in cash as a guarantee that they will fulfil
their contract obligations.
"Everyone is fixated on costs these days, so that (a cut in
margins) would be a material change to the market," said the
head of metals at a top LME broker, who declined to be named.
"For the LME, when you are competing with CME in copper that
could be significant."
It was unclear for the reason for delays in regulators
approving the LME's plans to cut margins, which the exchange had
hoped to introduce last autumn.
Both the Bank of England and the European Securities and
Markets Authority (ESMA), which regulate the exchange's clearing
house, LME Clear, declined to comment.
But two industry sources said progress on the proposal had
stalled with European Union regulators. "With the current
uncertainty about Brexit, the UK doesn't seem to be at the top
of their shopping list," one source said, referring to European
The LME said last August it had hoped to make "significant",
cuts to initial margins, without giving exact figures.
Those costs could be lowered by between 20 and 30 percent,
industry sources said, which would be most important for top
metals copper and aluminium.
"It's frustrating to us on this side of the fence," said
Michael Overlander, chief executive at broker Sucden Financial,
one of nine top-tier LME members allowed to trade in the open
Initial margins for one lot of copper at the LME are $12,800
while for an equivalent amount of copper on the CME they are
$6,834, according to the exchanges.
A key reason why LME margins are high is it has to make
calculations based on a two-day liquidation period while for the
CME it is only one-day. But LME brokers have a partial advantage
in that they can offset short and long positions when figuring
how much cash they have to provide the clearing house.
The LME, owned by Hong Kong Exchanges and Clearing Ltd.
, said in a statement that the changes were still
subject to "final regulatory approval" but did not give details.
The LME announced its plans to reduce initial margins at the
same time last August when it said it would cut fees for
short-dated trades, which market sources said was an attempt to
halt a slide in trading volumes.
Volumes on the 140-year-old LME have come under pressure
since trading fees jumped an average of 31 percent in January
LME trading volumes dropped an overall 7.7 percent in 2016
to 156.5 million lots while they are up 0.2 percent in the first
two months of 2017.
(Reporting by Eric Onstad; Editing by Veronica Brown, Greg