LME considers permanent closure of Ring trading floor
The London Metal Exchange (LME) is putting for consultation a proposal to permanently close the Ring trading floor. The proposal is outlined in a discussion paper on the future market structure.
The LME believes it is the right time to consider the permanent closure of the Ring and a move to an electronic pricing structure. This shift is expected to benefit the market by broadening direct participation during the price discovery periods and increasing overall transparency.
Matthew Chamberlain, LME Chief Executive, commented:
“The Ring is a greatly treasured aspect of the LME’s rich 144-year history, and its closure is not a decision we or our market will take lightly. However, the LME has stood the test of time precisely because of its ability to adapt to the evolution of market dynamics and trading behaviour.
“For the last 10 months, the Ring had to be temporarily closed due to the global COVID-19 pandemic. We have been clear that we will not use the pandemic as a pretext to close the Ring, and we remain committed to this; however, it is fair to observe that this period of electronic pricing has served the market well, with consistently high volumes of activity in the pricing window, easily observable by all stakeholders, and more participants with direct access.
The second set of proposals put forward are designed to bring greater liquidity to the central electronic venue, which is by nature the most transparent marketplace and enables the broadest participation. The proposals specifically focus on incentivising electronic trading on the member-to-member market in the following ways:
- Increasing fees for inter-office member-to-member trades, while reducing fees for electronic member-to-member trades;
- Introducing the Enhanced Transparency Cross – which combines the flexibility of the inter-office market with the transparency of the electronic market, by allowing members to bilaterally negotiate trades pre-execution and then to transact or “cross” any proposed trades in the electronic market, at the lower electronic fee;
- Potentially introducing block rules and a liquidity provider program.
The move from a “discounted contingent variation margin” (CVM) methodology to one of “realised variation margin” (RVM) was first considered in the 2017 Strategic Pathway, where the decision was made to keep the potential change under ongoing review. This discussion paper highlights the increased focus on the regulatory capital costs associated with CVM and explores the potential benefits of moving to an RVM methodology, which include an increase in trading efficiency, greater standardisation and the removal of some barriers to entry to the LME’s market.
Given the finely balanced nature of this debate, the discussion paper invites views on the relative merits of CVM and RVM, so that an appropriate roadmap can be developed.
Finally, the discussion paper considers the introduction of potential additional disclosures and policies to strengthen market conduct, such as in relation to stocks and the movement of physical metal. The discussion paper explores a regulatory news service for stock warranting or cancellations. It also considers some form of disclosure obligation for certain physical transactions, above a specific size, by those trading on the LME.
The LME invites feedback on all topics within the discussion paper from market participants and broader stakeholders from now until 19 March 2021. The LME aims to provide feedback and next steps before the end of the second quarter this year.