LONDON The London Metal Exchange might warn, fine or ban parties that act outside the letter or the spirit of new rules meant to cut out "structural" queues from its warehouse network, chief executive officer Garry Jones said Nov. 7.
Jones comments came as the LME announced it would reduce to 50 days the maximum length of queues to withdraw metal from its warehouse network, and further empower the exchange to take ad hoc remedial action against parties acting against the letter or the spirit of the rules. The measures will force warehouses with queues longer than 50 days at individual ports to load out more metal than they take in until the queue falls below the threshold, according to a "decay rate" formula.
Warehouse companies in backlogged locations, such as Detroit and Vlissingen, the Netherlands, will be required to deliver out at least 1,500 tonnes per day on top of existing obligations of 3,000 tonnes per day, as well as loading out any net inflows in full, mathematically ensuring that the queue will fall over the medium term.
In cases where warehouse companies or their owners attempt to create "structural" queues within the boundaries of the new rules, the LME will still be able to take action to prevent them from doing so on an ad hoc basis, head of strategy and implementation Matt Chamberlain said.
"We fully heard in the consultation that people are worried that whatever rules we put in place, warehouses or traders may find a way around them," he said. "(With these powers), even if someone creates a queue within the framework of our new rules well still be able to go after that behavior and address it."
Beyond raising the decay rate, or imposing one even when the queue is below 50 days, the LME could also terminate operating licenses or impose fines in certain cases, Jones and Chamberlain said, adding that there is no cap on the size of such fines.
The LME is also taking legal advice concerning its ability to cap warehouse rents and free-on-truck charges to avoid the possibility that warehouses will try to recoup any attendant increase in operational costs from users with material in the queues.
The 50-day rule will take effect April 1, 2014. The timeframe for introducing some of the dozen proposals announced Nov. 7 is still subject to change.
The LME still needs to consult with some stakeholders regarding the new rules, but it doesnt intend to change their content or the timing of their introduction, even in the face of legal challenges, Jones said.
"There may well be legal challenges; its not really a matter for us, its a matter for people who wish to do that, but we are going ahead as we planned and if there are any legal issues around that well deal with them as they come in," he said.
A version of this article was first published in AMM sister publication Metal Bulletin.