The London Metal Exchange and LME Clear (together, the LME) today announced the delivery programme for their strategic pathway, including product launches, membership enhancements and new trading efficiencies.
- 2017: carry fee reductions; financial OTC booking fee consultation; tick size review
- H1 2018: introducing broker membership; B share initiatives; optional T2 booking model
- H2 2018: new product launches; implied pricing; TAS functionality
- 2019 onwards: enhancements to clearing services and electronic trading platform
Matthew Chamberlain, London Metal Exchange CEO, commented:
We’re delighted to have received positive feedback on our strategic plans for the LME market. Looking ahead, we have an exciting delivery plan for 2018. One key area of expansion is our battery metals offering – we already list copper, nickel, aluminium and cobalt contracts, but we’ll be working with the battery and electric vehicle industries over the coming months to deliver new contracts such as lithium and cobalt sulphate to bring price risk management to this rapidly growing market.
We believe that our delivery programme for 2018 will fulfil our objectives to maximise trading efficiency, bring greater user choice and fairness and, above all, to support the physical market. As we continue to engage with our market we expect users’ needs to evolve and we are committed to provide the flexibility required to ensure these needs are met,” added Adrian Farnham, LME Clear CEO.
2017 delivery programme
In the interests of supporting the physical market and stimulating volumes, the LME introduced the first of its fee reductions for short-dated carry trades on 1 October, with the medium-dated carry fee reductions to be implemented from 1 November. Following supportive feedback from its users, the LME plans to issue a market consultation regarding the introduction of a fair financial OTC booking fee in mid-November, with any resulting implementation planned for early 2018.
The LME will also consult the market on the revision of tick sizes, with a view to ensure that only responsible algorithmic trading is encouraged on the LME market and that such practices may then be promoted through bespoke trading programmes.
2018 delivery programme
In the first half of 2018 the LME will, subject to market consultation, expand its membership to include introducing brokers, which will assist the growth of new products and open up access to the LME market. The value of members’ B shares will also be prioritised with the implementation of a B share matched bargain facility.
The LME will also introduce an optional T2 booking model to support user choice and trading efficiency. For those clients executing liquid contracts on the LME’s electronic platform, LMEselect, a T2 booking model – which removes two legs from an LME round-trip trade – would provide a more standardised and efficient execution method.
The second half of 2018 will see the introduction of implied pricing and trade-at-settlement (TAS) functionality on LMEselect. Implied pricing will provide infrastructural support to those wishing to execute standard monthly contracts electronically but who are currently unable to access them directly.
TAS, a standard function of most electronic markets, allows a trader to buy or sell a contract equal to the settlement price or at an agreed amount above or below the settlement price. TAS will enable LMEprecious reference prices to be traded electronically and will provide the necessary functionality to allow the LME closing prices for certain metals to be discovered electronically over a trial period in the latter half of the year. The trial will allow the market and the LME to assess the relative benefits of Ring and electronic closing price discovery.
The LME will look to launch a larger number of contracts in the second half of 2018 than ever before, with four product groups to be expanded. Following demand from market participants, the LMEprecious suite will grow to include gold and silver options, with platinum and palladium futures to follow. Working closely with the battery metals industry, the LME will look to build out its suite of contracts with the addition of a chemical cobalt contract, lithium, and potentially a chemical nickel contract.
In response to market feedback, the LME’s ferrous suite will be enhanced with a set of regional hot-rolled coil (HRC) contracts, while the LME’s aluminium complex will see the addition of regional cash-settled aluminium premium contracts as well as alumina.
2019 and beyond
Looking further ahead, the LME plans to transition to a Value-at-Risk (VaR) initial margin model with a view to reducing margin levels. In addition, the LME will develop its optional gross client omnibus account (GROSA) to allow the application of a lower margin methodology. The LME will continue to engage with its members and users regarding the provision of a separate dealer-to-client platform, and the LME’s central electronic trading platform will be enhanced, with delivery envisaged for 2020-21.