London Metal Exchange

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London Metal Exchange
NewLMElogo.jpg
Founded 1877
Headquarters London
Key People Matthew Chamberlain, Interim Chief Executive; Stuart Sloan, COO; Catherine Lester, CFO; John Lee, CTO; Tom Hine, General Counsel and Head of Enforcement
Products Futures and options on ferrous and non-ferrous metals, minor metals; benchmark prices for platinum and palladium; warehouse receipt repository services
Twitter @LME_news
LinkedIn Profile
Website www.lme.com/

Established in 1877 and based in London, the London Metal Exchange (LME) offers futures and options contracts for aluminium, copper, nickel, tin, zinc, lead, aluminium alloy, cobalt, molybdenum, steel scrap and steel rebar.

It is owned by Hong Kong Exchanges and Clearing Ltd, which purchased it on December 6, 2012.

The LME (as part of HKEx) was ranked as the world's 16th-largest derivatives exchange by volume in 2016, according to the annual volume survey published by the Futures Industry Association (FIA).[1]

Background

The LME has traditionally catered to physical producers and consumers of industrial metals, allowing hedging on specific dates to match company risks.[2]

The LME is a highly liquid global market with an international membership. Because it is a principal-to-principal market, the only organizations able to trade on LME are its member firms, of which there are various categories. LME members provide the physical and financial industry access to the market, to the risk management tools and to the delivery mechanism.

Trading takes place across three trading platforms: through open-outcry trading in the Ring, through an inter-office telephone market and through LME Select, the exchange’s electronic trading platform. Although the LME has adapted to the growth of electronic trading, it still operates Europe’s last open outcry trading floor.

Key People

Acquisition by Hong Kong Exchanges

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HKEx Chairman Charles Li, with then-LME CEO Martin Abbott

On July 25, 2012, LME shareholders approved a $2.2 billion takeover offer from Hong Kong Exchanges and Clearing Ltd. The vote was more than 99 percent in favor of the deal, according to an LME spokesman. HKEx's proposal won out over offers from its rivals CME Group, Intercontinental Exchange and NYSE Euronext. Sixty-seven stockholders controlling 12.86 million shares voted on the transaction, with 64 owners holding 12.82 million shares backing the bid. In a separate tally at an extraordinary general meeting, 12.75 million shares, or 99.24 percent, were voted for the sale and 98,000 against. [3]

According to HKEx, the deal will help grow the number of clients in China and will help disperse LME data across Asia. In addition, HKEx said it would "keep the LME’s existing warehousing network, help the bourse develop its own clearing house and freeze trading fees until at least the start of 2015." [4]

The LME continues to be based in London and is regulated by the FCA.

The LME’s clearing house, LME Clear, launched on September 22, 2014. [5]

On September 29, 2014, the LME announced it would increase transaction fees by 34%, starting in January 2015.[6] [7] The move was intended to help cover the rising cost of the regulatory environment and necessary system upgrades following the purchase of the LME by HKEx.[8] However, in December 2014 the LME cut the proposed increase to 31 percent after complaints by members.[9]

History and Ownership

The LME was founded in 1877 as the London Metals and Mining Company, providing contracts in tin, adding lead and zinc in 1920, aluminum in 1978 and nickel in 1979.[10]

The LMEX Index, its first index product, was started in 2000. The move into ferrous metals started with steel contracts in February 2008.

LME Holdings has two classes of members. Ordinary share members hold the equity rights, and transfer is restricted to existing and new members, with Class B holders allowed only to trading and clearing rights, though these can be bought and sold. The exchange released new B shares in 2007 to meet demand from brokers and merchants.[11]

On July 24, 2014 LME announced that it would upgrade its network service to provide three access levels to its electronic systems, including one geared to participants seeking lower latency. The exchange worked with Colt Technology Services to launch LMEnet, a dedicated network that will allow market participants to connect to all of the exchange's electronic systems, including LME Clear. The initiative uses Colt’s trading network PrizmNet to help streamline latency, performance and connectivity for LME users. [12] [13] The premium package will link clients directly into LME data centers, providing “dedicated low-latency connectivity,” the exchange said. The standard service is geared to providing trading, matching, clearing and market data for market participants not focused on low-latency trading.[14]

In March 2015 the LME announced it had entered into an agreement with Borsa İstanbul under which Borsa İstanbul would acquire the LME’s stake in clearing house LCH.Clearnet, and Borsa İstanbul, the LME and the LME’s parent company Hong Kong Exchanges and Clearing (HKEx) would partner on the dissemination of market data. Under the terms of the agreements, the LME licenses its steel billet settlement data to Borsa Istanbul, and works with the Turkish exchange to develop future products and services for the steel market.[15]

In February 2016 the LME relocated to new offices at 10 Finsbury Square. The Exchange's open-outcry trading venue, the Ring, was also moved to the new location, where £1 million was invested in enhanced technology, including new wall boards to help integrate Ring and LME electronic pricing and to provide more real-time information to inform traders’ decision-making.[16] The new offices were formally opened by President of Chile Michelle Bachelet in a ribbon-cutting ceremony in May 2016.[17]

Structure and Regulation

The LME operates three side-by-side trading systems. The original open-outcry floor, known as "The Ring," operates from 11:45 a.m. to 5 p.m. London time. The LME Select electronic system, introduced in February 2001, runs from 1 a.m. to 7 p.m. - extending hours into the Asian trading day in June 2006. And the exchange also operates 24-hour telephone trading among members.

In June 2014, after a six-month internal review and discussions with market participants, the LME said it had decided to maintain and further invest in its open-outcry trading floor.[18] Since then, the LME has invested hundreds of millions in upgrading its technology. It also announced that it will relocate its trading floor from Leadenhall Street in the City of London to a new building a mile north in Finsbury Square.[19]

The exchange operates as a market of "last resort" and provides physical delivery – though used in less than 1 percent of trades – through a network of more than 600 warehouses in 15 countries.

The LME is self-regulatory organization overseen by the UK Financial Conduct Authority.

Queuing Questions

In 2013, several plaintiffs in the U.S. brought class action suits, in some of which the LME was named as a co-defendant, alleging that warehouse owners such as Goldman Sachs and JPMorgan, along with mining company Glencore Xstrata, restricted supply and thereby inflated the price of aluminum. All three companies, as well as the LME, denied the claims and said they are without merit.[20]

The cases were brought after some users complained about the long waits to get metal, particularly aluminum, out of LME warehouses. The biggest warehouses have been taking more than a year to release the aluminum. The LME has proposed forcing warehouses with long queues to load out more metal.[21]

At the beginning of July 2013, the exchange announced a three-month consultation period on proposals to amend its warehouse regulations again to calibrate deliveries into the sheds with deliveries out. (The initiative only applies to locations where the delivery-out queue already stretches to more than 100 days.)[22]

On November 7, 2013, the LME proposed a rule that would link the amount of LME-traded metal an exchange-approved warehouse could accept for storage to the amount of the same metal it released whenever the warehouse could not process requests to discharge the same metal from storage in less than 50 days. (This proposal is known as the “LILO” rule, for "loaded out/loaded in.") However, the exchange was forced to postpone the implementation of the new rule, which scheduled for April 1, 2014, after the its decision process was challenged in a lawsuit by Rusal. A U.K. judge ruled in favor of Rusal, who claimed that the decision process was “unfair and unlawful”. The judge ordered a review of the LME consultation.[23] [24] [25]

In October 2014 the UK’s Court of Appeal ruled that the LME’s consultation process for its proposed rule changes was not unfair or unlawful, overturning the previous ruling.[26] After winning the appeal the LME said it would implement the new rule aimed at cutting the warehouse logjams after a two-week consultation with warehouses starting Oct. 9.[27]

In November 2015 the LME launched four regional aluminum premium contracts that allow consumers to hedge against the premiums paid to producers on top of the metal's price, as part of the exchange's attempt to reform its warehousing system. Premiums had been rising because of the lengthy queues.[28] The contracts are designed to work alongside the ‘parent’ LME Aluminium contract and involve a swap of warrants. [29]

The exchange also added three new delivery locations in 2014, extending its global network of warehouses to Kaohsiung in Taiwan, Moerdijk in the Netherlands and, for copper only, Panama City in the United States.[30]

On August 5, 2014 the LME published its first Commitments of Traders Report (COTR) in response to general market demand for broader transparency. The COTR is designed to reflect the nature of the predominant business activity that LME members and their clients are involved in. The report is designed to be viewed in conjunction with the existing daily warrant banding reports published each day by the LME in accordance with its Lending Guidance.

The COTR is published on a weekly basis and will consist of a report for each business day of the previous week. According to the LME's head of business development, the publication of the reports was requested by the physical industry following the LME's 2013 warehousing consultation.[31]

Volumes

2015

In 2015, 170 million lots were traded on the LME, the equivalent of 4 billion tonnes and $12 trillion in notional value.

2012

Volumes in December of 2012, the year in which the acquisition by HKEx was completed, were 10 percent higher year on year. The exchange also won six industry awards in that year. By 6 December 2012, the completion date for the acquisition, 149.6 million lots had traded on the LME, the equivalent of 3.5 billion tonnes and $13.6 trillion. [32]

2010

The LME on July 28, 2010 merged its Far East Asia and Mediterranean steel billets contracts into a single derivative, hoping to create a global benchmark. The exchange also added a delivery point in the United States, to complement current ones in Europe and Asia.[33] Trading activity in the exchange’s Mediterranean steel billet futures contract grew 385 percent to 57,606 lots ahead of the planned merger with the Far East steel billet contract.[34] [35]


Year Total Annual Volume Percent Change
2016 156,491,501 (-) 7.7%
2015 169,540,184 (-) 4.3%
2014 177,138,349 3.5%
2013 171,099,643 7.1%
2012 159,719,781 9.0%
2011 146,597,545 21.9%
2010 120,258,119 7.4%
2009 111,930,828 --

Product Development

The LME has evolved from its roots as an exchange for non-ferrous metals contracts in the wake of a changing customer profile and intensifying competition, notably from the Shanghai Futures Exchange, which vies with its UK rival as the seat of the largest metals complex.

The LME introduced futures on steel billets on its electronic and phone system on February 28, 2008 and on open outcry on April 28. Steel is the most actively-traded commodity after oil. Past efforts to launch steel futures had faced resistance from the producer community.[36][37] The contracts cover two regions: Mediterranean and Far East. Both contracts are physically deliverable; the initial delivery points include Turkey, Dubai, Malaysia and South Korea.

The existing complex was expanded with LMEmini contracts, for LME Copper Grade A, LME Primary Aluminium and LME Special High Grade Zinc on Dec. 4, 2006.

Plastics futures were introduced in May 2005, with contracts for polypropylene and linear low density polyethylene. However, in October 2010 the LME announced these contracts would be delisted, with a final prompt date of 29 April, 2011.[1]

Aluminum contracts remain the most heavily-traded on the exchange. Copper Grade A ranks second, followed by zinc, lead, nickel and tin, with options offered alongside the futures contracts.

In November of 2008, the LME upgraded its electronic trading platform LMEselect, in cooperation with Cinnober Financial Technology who also delivered the previous platform.[38] The exchange contended that the upgrade would provide a more robust system that offers operational efficiencies. The upgrade came on the back of a record trading month for the exchange. Exchange volumes were up 44 percent in October compared to the corresponding period of 2007 with 11,218,308 lots traded. LMEselect also recorded an increase of 23 percent on its previous record month.[39]

The exchange launched contracts for molybdenum and cobalt in 2010.[40]

The LME on July 28, 2010 merged its Far East Asia and Mediterranean steel billets contracts into a single derivative, which it hoped would create a global benchmark. The exchange also added a delivery point in the US, to complement current ones in Europe and Asia.[41]

On December 1, 2014 the LME took over the procedure for the platinum and palladium fixings in London from BASF Metals Ltd., Goldman Sachs Group Inc., HSBC Holdings Plc and Standard Bank Plc.[42]

At "LME Week" in London in Oct. 2014 the exchange announced the launch of Asian contracts for aluminium, zinc and copper in Hong Kong, to start in December and be denominated in renminbi. The contracts are called “minis” because they offer lots of 5 tonnes rather than the standard 25 tonnes, and they are targeted toward China’s numerous retail investors. They are cash-settled on the third Wednesday of each maturity month rather than physically settled as in the traditional LME contracts.[43]

The LME launched two new cash-settled ferrous metals products, LME Steel Scrap and LME Steel Rebar, in November of 2015.[44] The cash-settled futures contracts can be traded monthly out to 15 months and have a lot size of 10 tonnes. The LME's first voice-brokered trade of its LME Steel Scrap contract was executed on May 4, 2016 by INTL FCStone Ltd on behalf of Stemcor.[45]

In August of 2016 the LME, the World Gold Council and a group of banks and trading firms announced a new trading platform called LMEprecious to trade precious metals. The platform launched gold futures trading on July 10, 2017, trading 25,590 lots in its first week. It is the first gold futures contract offered at the LME in 30 years.[46] The exchange made one previous attempt to trade gold, but the venue ended up closing in 1985 after only three years for lack of domestic investor and speculator interest.[47]

Product Listing

Non-Ferrous Metals

Steel

Minor Metals

Resources

  • London Metal Exchange

For information about the LME please visit http://www.lme.com.

  • LMElive.com

For real time or 30-minute delayed prices and data direct from the LME sign up for a free trial of LMElive at http://www.lmelive.com.[48]

JLN Interview

Garry Jones took the reins of the London Metal Exchange (LME) at the end of September 2013. Just over a week into the job, he spoke with John Lothian News editor-in-chief Jim Kharouf about the LME’s next steps, what’s happening with the controversial warehouse issue, CME’s aluminum challenge and how LME’s parent company Hong Kong Exchanges & Clearing can become a metals powerhouse in Asia.

Read the interview HERE

References

  1. FIA 2016 Volume Survey. FIA.
  2. LME puts its foot on the high-speed pedal to attract volume. The Financial Times.
  3. LME Shareholders Approve HKEx’s $2.2 Billion Takeover Bid. Bloomberg News.
  4. Hong Kong Exchanges Bid For LME Beats Out ICE. Bloomberg.
  5. LME celebrates a record year following acquisition by HKEx. LME press release.
  6. LME plans to raise fees by a third. The Financial Times.
  7. LME announces new fee schedule. LME.
  8. LME to raise transaction fee by 34% from January 1. Platts.
  9. London Metal Exchange trims fee increase after complaints. Reuters.
  10. About the LME. London Metals Exchange.
  11. LME to release new B shares. Financial Times.
  12. LME and Colt Collaborate to Launch LMEnet. LME.
  13. LME Partners with Colt Technology Services for LMEnet Launch. Forex Magnates.
  14. LME Plans Network Service Geared to High-Frequency Trade. Bloomberg.
  15. LME to sell LCH.Clearnet to Borsa Istanbul, license steel data. Platts.
  16. https://www.lme.com/news-and-events/press-releases/press-releases/2016/02/london-metal-exchange-unveils-new-ring/
  17. https://www.lme.com/news-and-events/press-releases/press-releases/2016/05/chiles-president-bachelet-formally-opens-lme-and-lme-clear-offices/
  18. LME to keep open-outcry trading ring after review. Platts.
  19. London Metal Exchange rings the changes. The Financial Times.
  20. LME chief grapples with metals queue row. The Financial Times.
  21. LME consults on changes to warehouse policy to cut queues. LME.
  22. LME warehouse consultation paves the way for improvements: CEO. Platts.
  23. LME Shelves ‘Unfair’ Warehouse Rule After Rusal Wins Lawsuit. Bloomberg.
  24. LME to postpone launch of linked load-in, load-out rates. Platts.
  25. UK Court Authorizes LME to Proceed With Reform of Physical Warehouse Network. Bridging the Week by Gary DeWaal.
  26. LME wins UK appeal over metals delivery. The Financial Times.
  27. LME Will Start Warehouse Rule in February After U.K. Win. Bloomberg.
  28. LME To Offer Hedging Tool for Aluminum Buyers. The Wall Street Journal.
  29. LME Targets New Aluminum Contract as Soon as End 2014, CEO Says. Bloomberg.
  30. LME warehousing; all change or no change?. Reuters.
  31. LME publishes new commitments of traders report. Mondovisione.
  32. LME Celebrates a Record Year Following Acquisition by HKEx. LME press release.
  33. London sees surge in steel futures trading. Financial Times.
  34. Press Release. LME.
  35. London sees surge in steel futures trading. Financial Times.
  36. LME Seeks Profitable Billet with Steel Contracts. Financial Times.
  37. Press Release. LME.
  38. Press Release. Cinnober.
  39. Press Release. LME.
  40. LME Announces New Launch Date For Minor Metals. Energy Risk.
  41. London sees surge in steel futures trading. Financial Times.
  42. LME to Run Replacement for Platinum to Palladium Fixings. Bloomberg.
  43. LME Taps China Investors' Metals Interest. The Financial Times.
  44. LME eyes second half 2015 for ferrous launch. FOW.
  45. LME Steel Scrap contract sees first voice-brokered trade. LME.
  46. LME hopes gold futures contract will be blueprint for reform. The Financial Times.
  47. Gold futures come back to the London Metal Exchange. Mining.com.
  48. Press Release. LME.