London 01/07/2015 - The London Metal Exchange may begin a consultation on charge-capping (CC) if required, it said.
The LME believes that a cap on rent and FOT rates may be necessary to ensure the orderly functioning of the market, given the problems that high rent and FOT rates have caused for a prolonged period, it said on Wednesday.
A cap could protect metal owners, reduce the harmful effects of high incentives and ensure competition between warehouse companies, it suggested.
This follows consultation on warehouse reforms, whereby charge-capping was highlighted as a means to create a more level playing field and discourage the use of incentives funded by high rents and FOTs.
Still, many respondents acknowledged the legal risks inherent in introducing such a measure. Those concerned argued for a delayed implementation to allow sufficient time for all stakeholders to adjust to such a change.
Others argued that the LME would be "overreaching its remit in imposing artificial caps on warehouse operators' businesses" and that this would have an unduely negative impact on the market and would not restore any "normality" to the system.
“In the view of these respondents, the LME is free to stipulate the requirements for running a warehouse listed in its network, but should leave the operators to determine the cost of these operations or it will discriminate against those companies which distinguish themselves by offering better service,” it said.
Similarly, a cap might be unfair to warehouse companies that have made significant investments in their warehouse operations in the expectation that they would be able to attract metal; these plans would be substantially undermined by a charge cap.
This could mean that remaining in the LME warehousing business becomes uneconomic for some warehouse operators.
The long-term benefits for the market would, on balance, outweigh the negative consequences, the LME believes, particularly if CC were implemented at a future date to allow adequate time for market and warehouse company adjustment.
But the LME is conscious that a legal challenge to CC might have a 'contamination effect' on the other measures - changes to load-out rates and the introduction of caps on rents - on which it is proposing to consult and perhaps delay their implementation.
"Further, the LME acknowledges that CC could have a significant impact on warehouse companies and other sections of the market," it said.
(Editing by Mark Shaw)