LME
Consults on Proposals to Enhance Stocks and Pricing Transparency
·
Extending stock reporting to all metal eligible for
LME warranting
·
Making permanent existing controls to manage low
stock environments
·
Evolving the Closing Price methodology to enhance
determinism in price discovery
The London
Metal Exchange (LME) and LME Clear (together, LME Group) have today launched
two market consultations as part of their action plan to strengthen and enhance
their markets, announced in March. 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.
Matthew
Chamberlain, LME CEO, commented: “These consultations represent our first
formal market-wide engagement on the initiatives laid out in our action plan
earlier this year. 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. 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.”
Extending
stock reporting and managing low stock environment
As set out in
the LME Group Action Plan, providing greater transparency and increased
reporting of metal stocks stored in LME-licensed warehouses is important in
ensuring ongoing confidence in the operation of the LME’s market. The LME is
therefore proposing to extend its current off-warrant stock reporting
requirements – which have been in place since 2020 – to include all unwarranted
metal in LME-licensed warehouses that could be warranted in the future. This
would provide greater visibility of the build-up of warrantable material in LME
warehouses.
Acknowledging
concerns from some market participants around confidentiality, the LME also
recognises that a significant majority of the market prefers increased
transparency, which can support overall market stability.
A second proposal
puts forward rules to facilitate the permanent adoption of the temporary
controls put in place in 2022 designed to help mitigate the potential impacts
of low stock environments, and enhance the LME Group’s deferral powers. The
controls include a backwardation limit on “tom-next” contracts and a delivery
deferral mechanism, which the LME considers effective and important controls
when metal stocks are low, ensuring that distortions are not caused by
short-term delivery challenges.
The LME Group
is also considering a number of other miscellaneous rulebook proposals as part
of this consultation.
Evolving
the LME Closing Price methodology
As part of the
LME Group’s commitment to providing clarity on its future market structure and
delivering greater standardisation where possible, the LME has issued a second
consultation today which proposes the adoption of a more deterministic and
industry-standard Closing Price methodology, initially put forward as part of
the outcomes of the 2021 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 methodology to include Cash, 3-month
and the first four third-Wednesday monthly contracts in aluminium, copper,
lead, nickel and zinc.
Gavin
Prentice, Chairman of the LME User Committee, commented: “The User Committee
wholly supports the important work the LME is doing to strengthen and enhance
its markets. 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.”
While
acknowledging feedback from some market participants, notably the potential
impact the proposed change may have on some members’ ability to offer
guaranteed Closing Price orders to clients, the LME believes the proposed
pricing blueprint provides an appropriate balance in introducing a more
deterministic methodology for the most liquid instruments at the front of the
curve – providing greater transparency, encouraging liquidity throughout the
pricing windows and helping to achieve the most reliable pricing
outcomes.
The LME Group
invites market feedback on all proposals put forward in the consultations,
which close on 14 July 2023 and 30 June 2023 respectively.
Consultation on LME Closing Price methodology –
feedback deadline 30 June 2023 >