LME announces trading process changes

The London Metal Exchange (LME) and LME Clear, which together comprise the LME Group, have announced a two-year program of change designed to strengthen and enhance the markets of the metals traded via the platforms.

LME says the new action plan will address recommendations put forward in the Oliver Wyman report, which was issued following events in the nickel market in 2022.

Among the recommendations adopted is that daily price movement limits are being made permanent, with “indicative revised limits of 12 percent for copper and aluminum,” the LME says. Nickel pricing on the LME has been subject to a 15 percent limit on daily price volatility since the metal resumed trading in late March 2022.

The March 2022 volatility involved organizations with positions, some of which were based in China. That could be one reason why LME says it now is developing a “China-based Class II nickel spot market offering” in cooperation with the Qianhai Mercantile Exchange (QME). Both the LME and QME are owned by the Hong Kong Exchanges and Clearings Ltd.

“The actions we have taken since March 2022 and those we have set out in today’s announcement are vital in building confidence in LME nickel and to ensuring the long-term health and efficiency of LME markets more broadly,” LME CEO Matthew Chamberlain says.

James Cressy of LME Clear adds, “In addition to laying out plans to support LME Clear resilience, we are also today reconfirming our commitment to evolving the group’s market structure, which we continue to believe is key to ensuring we remain responsive to emerging risks and customer needs. Prioritizing transparency and maximizing trading and clearing efficiencies are crucial in driving greater liquidity for the benefit of the market as a whole.”

Regarding the price volatility limits, LME says its User Committee “has undertaken a detailed study to provide a granular per-metal calibration” of the limits. LME adds that it intends to implement this methodology by the end of this year’s second quarter.

LME also says it is “committed to rebuilding liquidity in LME nickel and, alongside reopening Asian hours nickel trading earlier this week, is today introducing a fast-track listing approach and fee waiver for new LME nickel brands—without relaxing the LME’s metallurgical or responsible sourcing standards—with the aim of bringing more stock and liquidity to the contract.”

Another LME method to increase the amount of Class I nickel material eligible for delivery involves the exchange considering “broadening its nickel contract to include coarse nickel powder (which is favored in the production of batteries as it can be readily converted into nickel sulphate).”

LME says it will finalize its position on that matter following an LME Nickel Committee meeting in April.

The exchange states, “Many of the measures included in the action plan will first require consultation prior to implementation. The first such consultation is planned for publication during May 2023 and will put forward proposals to make permanent the temporary measures introduced in 2022 to address the current low-stock environment and will also propose the introduction of monthly reporting of eligible stock (non-LME warranted metal in LME-licensed warehouses).”

Additionally, LME says it will put an immediate focus on continuing to evolve the Closing Price process into a more deterministic and industry-standard methodology, and that it will rely on input from the LME User Committee to do so.

Another change LME says it will continue to assess involves whether a “transition to a realized variation margin (RVM) model in the medium-term would be appropriate.” The LME has long used a contingent variation model (CVM) for settling trades.

When the idea to switch to RVM was approached in 2021, several traders of recycled metals, including Germany’s Verband Deutscher Metallhändler (VDM) organization, expressed their concern that it would be harmful to small-to-medium traders of physical shipments.