London 02/03/2015 - The London Metal Exchange will introduce fresh regulations and carry out further discussions with the market concerning the storage of metal in LME-registered warehouses, it said.
The exchange will review key aspects of warehousing such as rents and free on truck (FOT) delivery charges in a bid to end long queues for aluminium at a handful of warehouses.
"We have an obligation to the market to make sure that our physical delivery network is best in class, that it supports our exchange, price discovery and the ability of market players to hedge," Matt Chamberlain, the LME's head of business development, said in a briefing on Monday.
"The aim as we've always said has been to reduce the incidence of queues at LME-licenced warehouses. We've always been very clear that we don't want to see queues in the LME system," he added
The LME has rolled forward its intended start date for its premium contracts to facilitate hedging of the all-in price of aluminium because it is necessary to have in place actions to reduce queues and clear policy over rents before they are implemented, it said.
"To launch the contracts prior to this point would raise the possibility that, were the LME to announce the adoption of one or more measures in the discussion paper, forward premium expectations would change materially, resulting in significant price volatility for the premium contracts," Chamberlain said in a document updating the exchange's reform of its physical network.
CHANGES TO WAREHOUSE AGREEMENT
Primarily, the LME will change its warehouse agreement after a legal review undertaken by consultancy Oliver Wyman.
The LME has outlined a set of guidelines regarding what it deems acceptable incentives or 'inducements' given by warehouse companies to entice metal owners into leaving metal with them.
Warehouses must report all inducements to the LME from 1 January 2016, although this will be done on the condition of anonymity, the exchange announced in its changes to the warehouse agreement, which were released today.
The LME also initiated dialogue with the market on the tackling of queues via a discussion paper issued to the market this morning - mainly the possibility of capping warehouse rents and FOT rates as well as of banning warehouse operators from charging rent on metal that has spent more than 50 days in long queues to deliver metal out of warehouses.
European Commission competition regulation prevents the LME from setting, capping or influencing rents and FOTs; it can ask warehouses to reconsider but, ultimately, it is the warehouses that decide.
But assessing its powers to limit rents is part of the LME's comprehensive warehousing reform package. In November, CEO Garry Jones told journalists that the LME was seeking legal advice on its powers to cap rents.
The discussion period is set to run until May 2, with the LME aiming to update the market a month later.
The exchange also proposed an increase in the load-out rate at affected warehouses that would compel them to reduce queues at a faster rate. The discussion period for this will run until March 30.
(Additional reporting by Perrine Faye, editing by Mark Shaw)