London 08/10/2014 - The LME has begun a two-week consultation with listed warehouses regarding its intention to implement a linked load-in/load-out rule (LILO), it said
The consultation, which started today, will detail amendments to the LILO rule, which includes an altered start date, the exchange said in a press release on Wednesday.
The first calculation period will now start on February 1 next year following the required three-month notice period to warehouses. Each subsequent calculation period will be the three months immediately following the preceding calculation period, the LME said.
The exchange will use July 1, 2013-January 21, 2015 as its preliminary calculation period
Since the LILO rule is substantially the same as the 2013 LILO proposal, the LME does not have a regulatory or public law obligation to consult again but, under a clause in the warehouse agreement, it is obliged to consult with warehouse firms for a "reasonable period" prior to the introduction of any changes.
The LME has also added a provision allowing it to adjust the decay factor and/or queue threshold either on a market-wide basis or on a per-warehouse basis to "enhance the orderly functioning of the market or to prevent abusive behaviour or for any other reason", it said.
A decision will be announced no later than October 31 following the consultation.
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.
Earlier today, the LME won its appeal against Rusal at the UK's Court of Appeal, allowing the exchange to implement its new warehousing rules as planned.
Rusal had asked court of appeal not to set aside the order that the quashed the LILO when Rusal won its case in March this year but the court declined to do so.
"We are pleased to be moving ahead with our planned reforms following our success in the Court of Appeal," LME chief executive Garry Jones said.
"As the world's leading base metals exchange, the LME has a duty to ensure the integrity of its reference prices and the operation of a fair and liquid market for all industry participants," he added. "The implementation of the LILO rule and related reforms will assist us in continuing to fulfil this duty."
Ahead of the rule change, many warehouse operators behaved as if the regulations were already in place, with queues falling at locations other than Detroit and Vlissingen.
"Following the start of our consultation in July 2013, the behaviour of queued warehouses altered materially in that they have demonstrated a net load-out of metal since that time in anticipation of the LILO rule," Matthew Chamberlain, LME head of business development, said.
"[Although] market conditions have also improved since 2013, the market knows that a proportion of global metals production today still flows into storage," he added. "Without the LILO rule, large amounts of metal could have been directed to affected warehouses, thus further lengthening queues… the anticipation of LILO has meant that this has not occurred on as large a scale as it would have done otherwise."
And stock levels and queues should also fall over time at the Vlissingen and Detroit locations following the introduction of the new LILO rule, Chamberlain said.
Following the consultation, the LME will publish further information on other warehousing reforms that it has committed to discuss with the market, it said. These include reassessing the possibility of capping or banning rents in queues and of capping the level of daily rents and FoTs, the warehousing logistical and legal review and the rules required to support premium futures contracts.
(Editing by Mark Shaw)