London 18/03/2016 - The London Metal Exchange has proposed a regime of increased accountability for large market positions that would bring it closer in line with other exchanges amid a growing trend of tighter regulation, participants said.
The exchange will consult members about creating a more transparent reporting regime for positions that are above certain levels. Exceeding the relevant accountability levels will allow the LME to request further information regarding the position of that account or linked account.
The LME intends to publish accountability levels for single prompt dates as well as all prompt dates.
"We know that exchanges are constantly required to monitor excessive positions and managing specific limits on specific dates will simply discourage any potential squeeze. We already have such rules in all other markets," a Category One member said.
The move pre-empts the implementation of more EU regulations. MiFID 2 will see the introduction of position limits across a wide range of asset classes, including metals, but these will be executed by national regulators - for the UK this will be the FCA - and not exchanges.
"The driver was increased transparency around the existing surveillance processes that the LME undertake and to complement the existing lending rules and the future position limits to be implemented by MiFID 2," a source close to the matter said.
"[The LME] is looking to placate regulators… my suspicion is that this suggestion falls under the category of doing what's expedient," an industry consultant added.
The LME already scrutinises all positions held on the market and has long-running lending rules that limit the potential for large holdings to create a disorderly situation.
"There is no change to what [the LME] do today and, in general terms, [the LME] would intervene if it felt that the orderliness of the market was being compromised," the source said.
Large position holders have dominated markets - particularly aluminium, copper and, to a lesser extent, lead - throughout 2016, which has pushed spreads into a backwardation and put upward pressure on near-term prices.
Under the LME's proposed measures, members breaching accountability levels might not be allowed to accept further orders that increase the position or they may have to reduce the position to a level below the accountability level.
In essence, if a reduction of the position was requested, the position holder would have to undertake an "orderly" liquidation as requested by the exchange, FastMarkets understands.
"Action taken by the LME was always at the LME's discretion. Perhaps that is where the LME is going with this - just because the rule is there doesn't mean you have to use it. This form of discretion has always been a hallmark of UK business," the consultant said.
The exchange has always maintained a dialogue with the large position holders but these latest measures would mean that the process was more formalised and regimented.
"It is a move away from the older and more informal 'discussions' and a step towards a set of prescribed rules. That way the LME can show regulators it has a system put in place to stop it being open to abuse," a broker said.
Opinion is divided as to if these measures would affect liquidity or deter some current users from using the exchange.
"It may put some people off from continuing the same style of trading they have been doing but by killing one thing the LME could become more attractive to others who do not want to trade in a market which can be subject to volatility," the broker said.
"Greater transparency will be harder for funds and traders - but they're sophisticated and will adapt as they have before," the consultant said.
After the consultation finishes on April 8, the LME will then decide what action to take. Still, market participants said that the recent trend is for LME consultations to end in implementation, although there may be some tweaks to the final version of any new rules.
(Additional reporting by Martin Hayes, editing by Mark Shaw)