(The opinions expressed here are those of the author, a
columnist for Reuters)
By Andy Home
LONDON, April 25 The London Metal Exchange (LME)
has a new chief executive officer (CEO).
Matt Chamberlain, who has been acting CEO since the surprise
departure of his predecessor Garry Jones, was the front runner
from the very start, meaning the appointment was not exactly a
Chamberlain's relatively young age, 35, has raised some
eyebrows in the outside world but within the close-knit metals
trading community there is broad acceptance that he has more
than earned his metallic spurs by overseeing the tortuous reform
of the exchange's dysfunctional warehousing system.
He has, moreover, a close relationship with the LME's owner,
Hong Kong Exchanges and Clearing (HKEx), having been
part of the original banking team advising it on its 2012
purchase of the grand old dame of industrial metals trading.
Both attributes will stand him in good stead in the coming
days and months.
Because the new LME head will now oversee an even more
complex reform process that will determine the exchange's
The process has just been kick-started with the release of a
57-page discussion paper covering the full spectrum of how the
exchange works, or, in some cases, doesn't work.
VOLUMES, FEES AND DATES
Everyone agrees on what the problem is at the LME, which
acts as pricing reference point for much of the global trade in
industrial metals such as copper and aluminium.
Volumes have been sliding almost continuously for two years,
which is bad news for the LME's members, the exchange itself and
HKEx, which forked out an eye-watering $2.2 billion for the
The trickier part is finding a solution.
Industrial supply-chain users of the exchange don't want it
to change its existing weird and wonderful date structure, which
is still anchored on a continually moving three-month trading
date to match the Victorian-era shipping time for Chilean copper
to arrive in the UK.
But they do want a reduction in fees, particularly on
short-dated spreads, or carries as they're known, where volumes
have tumbled sharply as activity has drifted into the
Financial players could pick up the slack but many of them
want something a little less esoteric and closer to the
structure of other more vanilla futures markets.
The LME's previous attempts to square this circle have badly
It has partly reversed the fee hikes introduced at the start
of 2015 and now concedes that the analysis on which they were
based "did not fully reflect the specific features of the carry
An incentive programme aimed at boosting liquidity further
along the curve ran aground as existing members argued it risked
cannibalising their business. The programme has been suspended.
In short, neither side of the industrial-financial,
traditionalist-reformist debate has been satisfied.
The LME now seems to accept that its previous policy of
using incentives to push the market towards a more conventional
structure hasn't worked.
The first of its new "guiding principles" will be to
"protect those features that are core to the LME's market and
its physical user base" and to only pursue "growth
opportunities" when it can be done without "unintended
However, the LME's core position "is that, over time,
evolution to a monthly electronic liquidity model is likely."
But the new CEO's new buzz phrase is that the LME must
evolve on a "user choice model".
What this means is the exchange would continue to encourage
more liquidity on its forward monthly prompts but without "the
market being 'directed' to any given date structure".
Up for discussion are enhancements to the LMEselect
electronic trading platform, changes to the way trades are
margined and cleared, separate contracts tailored specifically
to the needs of investment players and even a whole new
Oh...and of course a reduction in fees on short-dated
spreads, albeit with potential offset by higher fees on other
types of trade.
The second component of what the LME calls its view of a
"managed transition" to a more conventional market structure
would be a contingency plan, if the current structure "was
giving rise to a material loss of business to competitor venues
or the OTC market".
Quite what the "trigger point" would be for Plan B to be
activated is itself up for discussion.
OLD CONTRACTS, NEW CONTRACTS
The "Discussion Paper on Market Structure" does what it says
on the box and much of it concerns the core Gordian knot of
volumes, fees and date system.
But it also includes sections on what to do with moribund or
foundering contracts such as molybdenum and aluminium alloy
Cash-settled solutions are possible for both with the alloy
contract being split into two to reflect European and Asian
Aluminium premium contracts are also up for debate. The
LME's own complex physically deliverable suite of products has
never traded while the CME's cash-settled equivalents have gone
from strength to strength.
The LME "acknowledges the receipt of a large number of
requests" for it to copy the CME model, which, bear in mind,
complements rather than competes with the LME's existing "basis
price" aluminium contract.
Even the LME's warehousing network is up for discussion
again, although whether anyone has the energy to do so after
years of tweaks and changes remains to be seen.
In the wings await the LME's gold and silver contracts,
although the start date has been pushed back a month to July,
and a build-out of more steel products after the successful
launch of scrap and rebar contracts.
TIME TO TALK
All of which may become somewhat academic if the exchange
and its members can't reach agreement on the core structure and
mechanisms for trading.
Yet, as the LME itself notes, this curious institution has
already lasted 140 years and has done so by continually
It will now need to do so again.
But as its new CEO was at pains to emphasise at a "Town
Hall" meeting in London on Monday, the LME executive now
understands it cannot force change against the will of either
its members or its industrial users, who lend the exchange its
pricing benchmark credibility.
The next few months will see further formal meetings to
discuss different components of the discussion paper before an
"outcomes" document is published over the summer.
The aim is to "seek feedback from all relevant
So if you are a "stakeholder", feel free to contact the LME.
The new CEO would love to hear from you!
(Editing by David Evans)