London 07/11/2013 - The London Metal Exchange (LME) has approved its proposed rule changes after amending them to cover all warehouses where queues exceed 50 days, it said.
In July, the exchange announced a consultation on a “linked load-out/load-in rate” proposal, targeting warehouses with queues of more than 100 calendar days. Under the proposed changes, those listed warehouse companies would have been made to deliver out at least as much metal as they deliver in.
But following the consultation process and a subsequent board meeting, the exchange has lowered that upper limit to 50 days, which will allow the LME to better deliver a market of last resort to physical metals users, it said in a statement on Thursday.
Under the rule change, all metal loaded into a warehouse over a three-month period is measured. If there is a queue of more than 50 calendar days, the affected warehouse would be expected to deliver out additional metal based on a formula.
For example, a warehouse currently required to deliver out a daily tonnage of 3,000 tonnes would, under the proposal, need to load out at least 1,500 tonnes per day more than it loads in. Additionally, if the current load-in rate of an affected warehouse exceeds the minimum load-out rate, then the warehouse would be required to deliver out tonnage equal to that excess.
While the implementation of certain elements of the new rules will require further discussion with warehouse companies in accordance with the terms of the warehouse agreement, it is not anticipated that this will delay implementation, which is planned for April 1 next year.
"We had a responsibility to examine concerns raised about lengthy warehousing queues, as these pose a range of issues in terms of price discovery and price convergence as well as the use of the market for effective hedging," LME CEO Garry Jones said.
"While the feedback we received over the three-month consultation period was varied and at times polarised, we believe that the amended proposal is, on balance, the best solution for all market users,” he added.
Jones called on all market participants to "move forward" under these new rules, which the exchange believes best balances the needs of all LME stakeholders.
A detailed report on the warehouse consultation, which was the basis for the independent decisions reached by the LME, will be released to allow participants to see how their feedback, including concerns around unintended consequences of the proposal and alternative solutions, was considered by the exchange in reaching this decision, it said.
The LME has closely engaged with the FCA to ensure that the changes are consistent with the exchange's regulatory requirements, it added.
NEW TRANSPARENCY REPORTS, CREATION OF PHYSICAL MARKET COMMITTEE
Additionally, the LME will investigate and act to prevent warehouse companies unreasonably incentivising the formation of queues and has agreed to enhance further the existing physical network in several ways, it said.
It will commission a full external logistical review of LME warehousing to address issues raised regarding reasonable operational expectations and requirements and review its warehousing agreement.
Alongside the new warehouse legislation, the LME will create a new physical market committee to provide the physical community with enhanced representation in the LME's governance structures.
The LME will continue to review its warehousing system every six months; the new committee will play a substantial role in this process.
The exchange has also committed to reaffirm its policy on information barriers by informing the market on an annual basis once it has received the third-party audits carried out on warehouse operators that are required to have information barriers in place and identifying any general issues that may arise from this process, it said.
It also plans to investigate the viability of products linked to premium price discovery and hedging; these are seen as complementary to the new policy targeting queues.
The LME intends to provide new delayed data on a per-warehouse basis and, separately, to look at publishing a commitment of traders report in response to market demand.
(Editing by Mark Shaw)