Traders unhappy at changes to LME position reporting regime

London Metal Exchange is introducing a weekly over-the-counter (OTC) position reporting framework for metals despite concerns from a majority of respondents during a recent consultation.

The new regime for all physically delivered metals, effective from 18 July, follows criticism of the LME’s oversight of markets when nickel prices rocketed 250% over three days in early March and prompted a suspension in trading for more than a week. The introduction of weekly OTC means LME’s existing requirement for daily reports on nickel positions is being withdrawn, also on 18 July.

LME has also appointed the Oliver Wyman consultancy to undertake an independent review and report by the end of the year (see below). In a statement on the change, LME makes clear the move is not popular.

‘In general, respondents were supportive of the LME’s desire to ensure the fair and orderly operation of its market but expressed reservations about the weekly OTC position reporting proposal, though several acknowledged the important linkages between OTC trading and the integrity of trading on-exchange.’

‘Challenging’ change

A majority of the 27 respondents to the LME consultation suggested any changes should await the outcome of the independent and regulatory reviews into the March events. They also questioned the scale of reporting and described the timeline for implementation as ‘challenging’.

‘A smaller majority also raised a concern that terms of contracts with clients, and potentially regulatory obligations, may be breached by compliance with the reporting requirements,’ the statement said. ‘The majority of respondents also raised a concern about the use of email for reporting on grounds of security (including cybersecurity) and suggested instead a secure file transfer protocol mechanism.’

LME added that ‘a significant minority’ of respondents suggested reporting would be ineffective given the global nature of the OTC market and a similar number suggested that position limits or other alternative measures, rather than reporting, should be relied on instead.

Recommendations

In a separate announcement, LME said the Wyman review would consider ‘the factors that contributed to market conditions in the Nickel market in the period leading up to, and including, 8 March 2022 and make recommendations to reduce the likelihood of similar events occurring’.

But it made clear the review will not cover the LME and LME Clear’s decision-making processes and governance arrangements because they are being considered by regulatory reviews. Oliver Wyman will review current practices in four areas:

• The LME Group’s market structure, including the supporting ecosystem of brokers and regulatory requirements.
• Trading rules, and trading controls on the LME, including, but not limited to, position management and volatility controls.
• Physical contract specifications and broader links to the physical market, including stock levels.
• Risk management policies and practices, clearing model and collateralisation levels of the LME, LME Clear and their members.