LME Swaps Bazooka for Ear Trumpet to Woo Back TradersBy and
LME has lost business to rival exchanges, private OTC venues
New CEO wants to reverse the slide, starting with market talks
When the London Metal Exchange faced a crisis over its warehousing system five years ago, the head of the company’s parent promised to aim a “bazooka” at the problem.
For Matthew Chamberlain, who was named LME chief executive officer last week, the weapon of choice is less warlike: a discussion paper. The 58-page report, published on Monday, is Chamberlain’s first attempt to address a sharp decline in volumes, the biggest challenge facing the 140-year-old home of global base-metals trading.
“Falling volumes are probably the driver for understanding that we have to look at these issues,” Chamberlain said in an interview at the LME’s London office. “Putting out a discussion paper is not as macho as just coming out and saying I’m going to do XYZ. On the other hand, it really forces you to understand how your market operates and articulate your own view.”
The move comes after a bruising year of confrontation between the exchange and its core community, and the departure of previous CEO Garry Jones, who resigned in January. The brokers, banks and traders who are the LME’s main users have complained that the exchange’s move to increase trading fees in 2015 helped cause the decline in volumes.
LME volumes fell 7.7 percent across all contracts in 2016, while average daily trading in copper at CME Group Inc. jumped 27 percent. Trading also moved to over-the-counter market, with banks and brokers such as JPMorgan Chase & Co., Goldman Sachs Group Inc. and Marex Spectron Group Ltd. building popular OTC platforms to serve members frustrated by rising LME costs.
"Most people just want the exchange to regain its prominence,” said Simon Van Den Born, global head of metals at Marex Spectron in London.
Chamberlain’s discussion paper contains few policy prescriptions, but makes clear that the LME, bought by Hong Kong Exchanges & Clearing Ltd. for $2.2 billion in 2012, isn’t prepared to stand by while its market share is whittled away by competitors.
The LME’s paper outlines options for transitioning away from three-month forward contracts – a relic from the 1800s when ships needed three months to haul copper from Chile to the U.K. – to a more standardized contract.
Most other commodity exchanges, including CME and the Shanghai bourse, offer futures with settlement on a set day each month, a structure generally preferred by financial investors.
Calculating an implied price for a set date – the third Wednesday of each month – would be the option that “causes the least disruption to those who want to remain with the traditional model,” Chamberlain said. It would require a “non-trivial investment” in the millions of dollars by the LME, he added.
The paper took aim at the OTC market, which boomed after the LME increased fees. It outlined plans to cut fees on so-called “carry trades,” a strategy used by traders to move positions from one date to another, as part of an effort to increase overall volumes.
It also responded to proposals – most notably by financial technology firm Autilla Inc., which partnered with former LME CEO Martin Abbott – to set up competing exchanges to capture OTC metals trades.
“Our prices in our view are our intellectual property,” Chamberlain said. “We wouldn’t expect to see competing platforms using those prices without a business relationship with us.”
While Chamberlain insists that parent HKEx has “not set any thresholds or trigger points,” the discussion paper hints at stronger action.
If the consultative approach fails and it’s apparent that the LME’s current structure is “giving rise to a material loss of business to competitor venues or the OTC market,” it will prepare a contingency plan, the report said.
The exchange expects to publish results of the paper in autumn.
Michael Overlander, CEO of Sucden Financial Ltd., a LME broker, said some trading activity that had migrated away would be hard to recover, but welcomed the exchange’s move.
“Maybe the barn door has well and truly been left open, but I still think there are a few animals left in the stables,” he said.