ISRI submits comments to LME

March 19, the Institute of Scrap Recycling Industries (ISRI), Washington, submitted comments to the London Metal Exchange (LME) regarding the LME’s "Discussion Paper on Future Market Structure."

The LME is considering whether to switch from its current contingent variation model for traders taking a hedging position to a realized variation model, which is widely used in other trading exchanges.

In its comments, ISRI expresses optimism that the LME’s management will incorporate input from its customers and brokers to ensure that credit is available to customers who need it. However, ISRI highlights areas of concern and opposition regarding changes that would limit the ability of LME member dealers to extend credit lines, the potential move to 24-hour electronic trading and other changes that could prove detrimental for recyclers and other industries that deal in physical metal.

The full text of ISRI’s comments are available here. Excerpts of comments from ISRI’s Nonferrous Division members regarding the proposed changes are provided below:

1. While ISRI Nonferrous Division members have voiced their appreciation for the tradition and function of the physical ring/open outcry, a number of members have expressed their adamant opposition to any changes that will affect the ability of LME member dealers to extend credit lines. …
2. … drawbacks related to the change from a discounted contingent variation margin system to a realized variation margin system include potential mismatches between physical hedges and the exposure of the LME contracts …
3. … members are also concerned that the proposed changes will result in increased transaction costs and brokerage fees, which in turn will inhibit scrap recyclers’ ability to hedge their price risk exposure, particularly for small and medium-sized businesses.
4. … increased electronic trading could be detrimental for manufacturers, scrap dealers and other market participants that deal in physical metal …
5. … members have expressed concern that the move to 24-hour electronic LME trading will shift market control from physical market participants to commodity traders, compounding traders’ undue market influence and opportunities for market manipulation.

The comments ISRI submitted are similar to the concerns expressed in a March 11 episode of “The Challenge,” the Bureau of International Recycling’s broadcast on the proposed changes that featured Matthew Chamberlain, LME CEO.

Mark Sellier, president of Hong Kong-based Global Metals Network, and Murat Bayram, a Hamburg, Germany-based managing director for Europe with United Kingdom-based EMR Ltd., took issue with the change during “The Challenge” broadcast, saying such a switch is viewed unfavorably by buyers and sellers of material who hedge with the LME.