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‘No final decisions yet’ on modernising LME

Scrap dealers have been assured that proposals to fundamentally change the way the London Metal Exchange (LME) operates remain for discussion only at this stage and may not be adopted. The ‘modernising’ measures affect margin methodology and replacing the historic physical trading ‘Ring’ with electronic technology.

Matt Chamberlain, ceo of the LME, was the key guest for the latest online debate staged by the Bureau of International Recycling in its ‘Challenge’ series. He emphasised that ideas for a future LME in a discussion document published in January were prompted by the desire for greater transparency, increased digitisation across commodities trading and to met the modern needs of its customers.

One suggestion, previously considered and rejected in 2017, is the possibility of changing the margin valuation basis of the current contingent variation margins (CVM) to a realised variation margin (RVM) basis favoured by the financial sector. Scrap traders fear this would have significant and detrimental implications for trade hedgers, who are heavily dependent on credit lines availability from their brokers.

Panellist Muryat Bayram, md of European Metal Recycling, argued CVM was vital for the many small and medium sized companies in the recycling community. ‘Credit lines give us the security that by the time we bring goods to the smelter we don’t have to worry about daily cash in and cash out,’ he argued. ‘RVM will not be the solution – imagine bringing the admin and IT solution on top [of everything]. We are quite worried about that.’

Chairman Michael Lion, who heads BIR’s International Trade Council, noted that the global metals industry overwhelmingly believed the current CVM margining model was crucial. In response to this united front, Chamberlain said the LME remained ‘very open’ to the possibility of accepting that position.

Despite other commodity trading platforms operating differently, he said he was ‘happy for LME to be non-standard if that is the right thing’. ‘But we should be verifying we are making the right decision. Four year go, [customers] they said they loved CVM so we kept it.’

Ring-ing the changes

For a year, the LME’s unique open outcry Ring has been closed because of the pandemic. A suggested permanent closure with the introduction of full electronic trading prompted Lion to note there was ‘significant sentimental emotion’ attached to the debate. But he believed maintaining the Ring had to be based on persuasive evidence that not only was this best for its users and members but also rewarded the LME’s owners, the Hong Kong Stock Exchange.

Another panellist, Mark Sellier, president of the Global Metals Network, was concerned that prices determined by activity created by financial and algorithmic participants could at times distort the underlying trade conditions for accurate global metals prices. Bayram added his fear that such distortions could have enormous consequences for the trade and industry sector. He quoted recent detailed concerns about the proposed LME changes from the Verband Deutscher Metallhändler (VDM), the German metals trade body of which he is a director. Lion suggested the integrity and responsibility that VDM attributed to the LME was a significant reason for keeping the status quo, as the LME had always stated support from the trade was a priority of their core mission. Linking the two issues, Sellier added: ‘CVM and the Ring give a special offering to the trade for benchmark pricing.’

Chamberlain acknowledged the observations, saying ‘There is a huge emotional element to the Ring. It’s a big part of our identity and a real source of pride for LME as much as the dealers. I’m glad we are having a data-led debate rather than emotional one.’

LME had to show that a democratic and transparent approach to pricing activity, he pointed out, and an electronic market might best achieve this. Nobody wanted to be the one to finally close the Ring after 144 years, he added, but that all aspects had to be realistically considered.

Sustainability

Lion suggested closer interaction between BIR and the LME to assist LME’s mission for greater sustainability. Chamberlain acknowledged there was a growing interest from smelters to report the use of recycled content in their operations – and this trend would grow further, although there were practical issues across scrap supply chains. He also noted that, through its ferrous scrap contract and forthcoming UBC aluminium can scrap contract, there were significant roles for recycling within the LME. ‘Recycling is at the heart of the circular economy and the sustainability debate,’ he added.

Finally, Lion raised the issue of regulatory ‘equivalence’ between the EU and The City of London. Chamberlain assured him that the LME had acted pre-emptively to satisfy its requirements in that regard and VDM’s support for the London-based LME as its institution of choice was reassuring.

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