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Ringing out the year of LME’s big bang

Keywords: Tags  London Metal Exchange, LME, warehousing, HKEx, Andrea Hotter

NEW YORK — Ever since Hong Kong Exchanges & Clearing Ltd. (HKEx) chief executive officer Charles Li signaled his intent to look more closely at warehousing, 2013 was destined to be remembered as the year that rang with a bang for base metals.

It’s the year the London Metal Exchange took out its bazooka and—after careful consideration of the field of action—lined it up, took aim and then propelled a rocket firmly into the proverbial rear of the warehousing system.

The debate over warehousing has arguably overshadowed other developments at the LME for several years.

Consultation upon consultation failed to properly tackle what industry participants increasingly viewed as a major problem: long queues in accessing metal from warehouses, along with high premiums for physical delivery.

That debate came to a head this past summer.

In a surprise move in July, the LME announced proposals designed to address the issues and launched a three-month-long consultation led by Matt Chamberlain, the new head of business development.

That consultation culminated in a tweaking of the original proposal and a plan to force warehouse locations with queues of more than 50 days to deliver out more material.

Time will tell whether the changes will make a difference. Premiums have firmed, not eased, as the positive market conditions for financing deals—low interest rates and a contango—have remained.

But what the changes to the warehousing rules represent is something far bigger.

In case anybody had forgotten, they were a bold reminder that the LME has a new owner and that things were going to be very different from now on.

That ownership change has been accompanied by a new chief executive officer, albeit earlier than HKEx had anticipated.

Martin Abbott resigned in June after roughly seven years at the helm, having led the sale of the exchange to HKEx.

Abbott’s resignation was swiftly followed by the departure of a number of other senior management individuals who had worked closely with him—including Chris Evans, Diarmuid O’Hegarty and Liz Milan—and the eventual appointment of former NYSE Liffe chief executive officer Garry Jones to the top job at the LME.

But it’s more than a new style of boss. The substance and approach are different as well.

The warehousing changes revealed this clearly, when the LME said it wouldn’t shy away from both policing and enforcing the rules if necessary, and was seeking the legal underpinning to do so.

So too did Jones’ comments in November on the ring, which HKEx has committed to for another year only. Noting the advance of electronic trading, Jones said the exchange was reviewing the best price-discovery method, sending shivers down the spines of floor traders.

It’s a far cry from a commitment to the 136-year-old floor as long its members wanted it, the long-held verbal response that the exchange has given in the past.

But this flexing of the exchange’s muscles might well backfire, particularly if industry peers like CME Group Inc., Chicago, can launch new products with the backing of key—and now disenchanted—LME market participants.

There have nonetheless been giant strides toward the launch of LME Clear, a project initiated before HKEx took over and a critical component in the metal exchange’s plans for growth going forward.

The LME also launched a shorter pricing period for its Asian benchmark prices, concentrating liquidity into a five-minute window and increasing the relevance of that price.

The exchange has said it will introduce a Commitments of Traders report, new physical contracts and a committee for physical users of the exchange.

Now it needs to navigate its way through the warehouse-related lawsuits hanging over its head, as well as develop new products, attract new members and keep the various groupings of the exchange as happy as possible without going back on its tougher, this-is-how-the-new-LME-does-it stance.

If 2013 was a tricky year, then 2014 could go either way.

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