London 07/12/2015 - The London Metal Exchange (LME) will have total visibility on warehouse incentive levels from April after a new reporting rule is implemented in the New Year but will be accommodating as long as inducements are not related to queues, FastMarkets understands.
From January 1, LME-registered warehouse companies will have to report any incentive they offer stock owners to attract metal into their sheds, including details of any rent deal , to the exchange on an anonymous basis - without revealing the identity of their clients.
The reporting will be three months in arrears so the first reports are due on April 1 for the first three months of the year. They will also be confidential.
The LME repeated at the end of last month that there would be no ban on incentives paid by LME-licensed warehouses despite certain market participants asking for it.
"The LME is worried about the attractiveness of LME warehousing as opposed to non-LME storage and that's why they have decided not to ban incentives," a source told FastMarkets.
Indeed, if the LME did proscribe the payment of incentives on LME-warranted metal, it would have no such powers in respect to off-warrant material, which would probably drive further tonnage into off-warrant, out-of-sight storage locations.
Already, stricter LME rules on load-out rates and queue prevention have pushed a great deal of metal away from the exchange and into cheaper and more flexible non-LME storage. LME stocks have dropped to 4.23 million tonnes on Monday from 5.83 million tonnes at the start of the year, with 1.58 million tonnes booked for removal.
"Accordingly, the LME's preference is to ensure that any incentives paid are proportionate and non-distortive of the market," the exchange said in a notice to customers on November 27.
"The LME is not attempting to prohibit the payment of incentives. The sole purpose [of the new rule] is to prevent the payment of exceptional incentives which have a manipulative, distortive or disorderly effect on the market," the LME also explained back in March this year.
In summary, only incentive payments which are significantly out of line with what would ordinarily be expected will be under scrutiny, it said.
WHAT IS AN ACCEPTABLE INCENTIVE?
Warehouse companies have welcomed the LME's decision not to ban incentives but have expressed concerns over the lack of clarity about the acceptable levels of incentive payments.
"The LME will be flexible. Basically, as long as the incentive is not based on queue revenue, it's OK," a source close to the exchange said.
"It can be based on expected income from rent, FOT and other charges it expects to receive in the period during which the metal is stored, and take into account things like contangos and interest rates - all that's OK," he added.
All the LME wants is to have "access to information which will assist it in ensuring that inducements are not distorting the flow of metal and the orderly functioning of the market", it said in the November 27 notice.
But warehouse operators are uneasy. Some believe the latest reporting requirement will restrict their ability to attract metal on-warrant while others have argued that it infringes European competition laws.
"It's a bit of a gamble - what seems to us like an acceptable incentive may be excessive for the LME," a source at one operator said. "And we can't really expect an objective judgement given their obvious anti-warehouse stance."
"The LME is totally wishy-washy on bad incentives," another operator said.
For guidance, the LME said that "reasonable and proportionate" inducements funded from anticipated rent and FOT rates were acceptable, especially if they come in the form of rent or FOT reduction rather than payment of an upfront incentive.
But incentives that could delay unreasonably the receipt or despatch of metal, create or prolong a queue or have a manipulative or disorderly effect on the market are unacceptable.
"It will be interesting to see what happens in January when incentives become transparent. We could see the flow to non-LME [storage] accelerate," a third warehouse source said.
(Editing by Mark Shaw)