LME explores additional transparency measures

The London Metal Exchange (along with LME Clear known as the LME Group) has launched two market consultations examining how to offer additional pricing and inventory transparency measures.

“The proposals are designed to bring greater visibility of unwarranted metal stocks, make permanent existing controls around the management of low stock environments, and enhance the transparency and determinism of the closing price discovery process by expanding the use of volume-weighted average prices (VWAP) in the LME’s methodology,” the LME says.

The LME says the goals of its Group Action Plan include providing greater transparency and increased reporting of metal stocks stored in LME-licensed warehouses, calling it “important in ensuring ongoing confidence in the operation of the LME’s market.”

“These consultations represent our first formal market-wide engagement on the initiatives laid out in our action plan earlier this year," CEO Matthew Chamberlain says. "The plan and the proposals presented today are ultimately designed to ensure the long-term health and efficiency of LME markets and to support the trading community in building deep, resilient liquidity for the benefit of all our users.”

The actions by the LME are taking place largely in response to a pricing anomaly in the nickel market that took place in March 2021.

Currently, the LME says it is proposing to extend its current off-warrant stock reporting requirements—which have been in place since 2020—to include all unwarranted metal in LME-licensed warehouses that could be warranted (registered with an owner) in the future. This would provide greater visibility of the build-up of warrantable material in LME warehouses, the exchange says.

The LME says it acknowledges concerns from some market participants around confidentiality, but also recognizes a significant majority of the market prefers increased transparency, which can support overall market stability.

A second proposal puts forward rules to facilitate the permanent adoption of the temporary controls put in place last year designed to help mitigate the potential impacts of low-inventory environments and increase the LME Group’s “deferral powers.”

Those controls include a backwardation limit on “tom-next” (tomorrow or next day) contracts and a delivery deferral mechanism, which the LME considers as “effective and important controls when metal stocks are low, ensuring that distortions are not caused by short-term delivery challenges.”

The second consultation process concerns the proposed the adoption of what the LME calls a more deterministic and industry-standard closing price methodology, which it says initially was put forward as part of the outcomes of the 2021 Discussion Paper on Market Structure.

“With input from the LME’s 2021 Closing Price working group (with representatives from a broad range of market participants) as well as the LME User Committee, the LME now proposes to expand its existing VWAP [volume-weighted average price] methodology to include cash, three-month and the first four third-Wednesday monthly contracts in aluminum, copper, lead, nickel and zinc,” the exchange says.

“The User Committee wholly supports the important work the LME is doing to strengthen and enhance its markets,” says Gavin Prentice, chair of the LME User Committee. “While there are a range of views on the proposals presented today in respect of the closing price determination process, overall the committee agreed that the proposed pricing blueprint represents the appropriate path forward as the LME looks to evolve the pricing methodology.”

The LME says the proposed change may affect some members’ ability to offer guaranteed closing price orders to clients, but says it believes the proposed pricing blueprint provides an appropriate balance in introducing a more deterministic methodology for the most liquid instruments at the front of the curve.

The LME Group invites market feedback on all the proposals, with the information gathering processes ending June 30 or July 14, depending on the proposal.

“We can only achieve these aims by working together with our users and we would therefore encourage market participants to provide their feedback on the proposals put forward today,” Chamberlain says.