LME consults on proposals to increase stocks and pricing transparency
The proposals are designed to bring greater visibility of unwarranted metal stocks, make permanent existing controls around the management of low stock environments, and enhance the transparency and determinism of the Closing Price discovery process by expanding the use of volume-weighted average prices (VWAP) in the LME’s methodology.
As set out in the LME Group Action Plan, providing greater transparency and increased reporting of metal stocks stored in LME-licensed warehouses is important in ensuring ongoing confidence in the operation of the LME’s market. The LME is therefore proposing to extend its current off-warrant stock reporting requirements – which have been in place since 2020 – to include all unwarranted metal in LME-licensed warehouses that could be warranted in the future. This would provide greater visibility of the build-up of warrantable material in LME warehouses.
Acknowledging concerns from some market participants around confidentiality, the LME also recognises that a significant majority of the market prefers increased transparency, which can support overall market stability.
A second proposal puts forward rules to facilitate the permanent adoption of the temporary controls put in place in 2022 designed to help mitigate the potential impacts of low stock environments, and enhance the LME Group’s deferral powers. The controls include a backwardation limit on “tom-next” contracts and a delivery deferral mechanism, which the LME considers effective and important controls when metal stocks are low, ensuring that distortions are not caused by short-term delivery challenges.
The LME Group is also considering a number of other miscellaneous rulebook proposals as part of this consultation.
As part of the LME Group’s commitment to providing clarity on its future market structure and delivering greater standardisation where possible, the LME has issued a second consultation today which proposes the adoption of a more deterministic and industry-standard Closing Price methodology, initially put forward as part of the outcomes of the 2021 Discussion Paper on Market Structure.
With input from the LME’s 2021 Closing Price working group (with representatives from a broad range of market participants) as well as the LME User Committee, the LME now proposes to expand its existing VWAP methodology to include Cash, 3-month and the first four third-Wednesday monthly contracts in aluminium, copper, lead, nickel and zinc.
While acknowledging feedback from some market participants, notably the potential impact the proposed change may have on some members’ ability to offer guaranteed Closing Price orders to clients, the LME believes the proposed pricing blueprint provides an appropriate balance in introducing a more deterministic methodology for the most liquid instruments at the front of the curve – providing greater transparency, encouraging liquidity throughout the pricing windows and helping to achieve the most reliable pricing outcomes.
The LME Group invites market feedback on all proposals put forward in the consultations, which close on 14 July 2023 and 30 June 2023 respectively.