(The opinions expressed here are those of the author, a columnist for Reuters)
By Andy Home
LONDON, April 25 (Reuters) - 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 shocker.
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 ultimate viability.
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.
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 London market.
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 over-the-counter shadows.
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 backfired.
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 market”.
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 consequences”.
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 dealer-to-client platform.
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.
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 respectively.
Cash-settled solutions are possible for both with the alloy contract being split into two to reflect European and Asian trading preferences.
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.
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 evolving.
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 stakeholders”.
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