LME Stands to Gain as EU Seeks OTC Derivative Transparency

The London Metal Exchange, the world’s biggest industrial-metals marketplace, stands to gain as the European Union seeks greater transparency for over-the-counter derivatives, its deputy chief executive officer said.

“The fact that the stuff the LME currently doesn’t see will end up needing to be cleared means more business for the exchange,” Diarmuid O’Hegarty said today at a press conference. The LME held a separate briefing on the EU’s European Market Infrastructure Regulation for its members, which include JPMorgan Chase & Co. and Deutsche Bank AG.

EMIR mandates clearing of OTC derivatives, as well as reporting of all derivative contracts to a so-called trade repository. Clearinghouses operate as central counterparties for all trades made by their members to reduce risk from an individual default. The LME is starting its own clearing business with a goal of going into operation next year.

Implementing EMIR has been “factored into the job” of setting up LME Clear, O’Hegarty said. The LME is “halfway” through starting the clearing unit, Trevor Spanner, managing director for post-trade services, said Feb. 12.

Regulators around the world are seeking to push more trading onto clearinghouses in reaction to the 2008 financial crisis. Investors bought and sold contracts worth $14.5 trillion last year on the LME, where copper, aluminum, nickel, tin, zinc and lead are traded.

Rules including EMIR will increase the costs of running metals businesses, according to O’Hegarty. He said the new regulations will amount to “a benefit” in case of an event similar to the 2011 collapse of futures brokerage MF Global Inc., which reported a $1.6 billion shortfall in customer funds.

Increased rulemaking was not aimed specifically at the metals market, and regulators have yet to provide definitions for OTC derivative contracts, O’Hegarty said.

(Updates with LME clearing unit starting in third paragraph.)
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