London Metal Exchange scraps OTC trade plan, to hike fees instead

The London Metal Exchange (LME) has dropped proposals requiring private bilateral deals between members and clients to be traded on its platform and is instead planning to raise fees for those contracts that use LME prices.

Industry sources said the turnaround came after members told the LME that the plan would be expensive for them and that other exchanges such as COMEX do not have this requirement.

The exchange’s plans to oblige members to transact private deals, known as over-the-counter (OTC) trades, on its electronic trading system Select were intially mooted in a white paper last year.

There will be a consultation period until June 13 on the revised plans, which include hedging LME contracts on Select.

The LME will progress with the original proposal if market monitoring indicates that on-exchange controls are encouraging more trading to take place OTC.

“Given this, the LME intends to increase the fee for OTC (trades) to be twice that of exchange business,” the exchange said in a release on Wednesday.

Fees for using LME prices in OTC contracts are $2.36 per lot. For copper where one lot is 25 metric tons, that would amount to nearly 10 US cents a ton.

Since the paper was published the LME, owned by Hong Kong Exchanges and Clearing, has talked to its members and the wider metals market about its plans to boost transparency and liquidity.

“We have listened carefully to these views and they have enabled us to refine different elements to better meet the needs of different sections of the market,” said LME chief executive Matthew Chamberlain.

Earlier this year Reuters reported that the Futures Industry Association (FIA) and the Association for Financial Markets in Europe (AFME) sent a joint letter to the LME laying out members’ concerns about these proposals.

The LME, the world’s largest and oldest forum for trading metals, has also tried to address members’ concerns about hedging LME contracts or block trades of up to 10 lots for the most liquid contracts, which include the three-month benchmarks.

“The feedback received suggested that there should be differentiation across different metals,” it said.

The LME has analyzed factors such as bid/ask spreads, size of the book, average trade size and notional size. It is proposing 15 lots or 375 tons for aluminum, 10 lots or 250 tons for copper, zinc and lead and 5 lots or 30 tons for nickel.

The plans also include expanding the definition of lower-cost short-dated carry trades to 60 days from 15 days, so long as the contracts to buy and sell are within 15 days of each other.

This will cut costs for physical market buyers and sellers who may want to switch delivery dates.

(By Pratima Desai and Eric Onstad; Editing by Jan Harvey and Freya Whitworth)