7 June 2016
MEDIA WORKSHOP
INTRODUCTION TO THE LME
Trevor Spanner Chief Operating Officer Group Risk Officer Agenda
1 History, Purpose and Workings of the London Metal Exchange
2 LME Contracts and Prompt date structure
3 LME Warehousing and Reform
4 LMEshield
5 LME Liquidity Roadmap
6 Clearing
7 Conclusion
2 Agenda
1 History, Purpose and Workings of the London Metal Exchange
2 LME Contracts and Prompt date structure
3 LME Warehousing and Reform
4 LMEshield
5 LME Liquidity Roadmap
6 Clearing
7 Conclusion
3 London Metal Exchange From 1877 to today
The origins of LME goes back even further…
1. Origins in The Royal Exchange, London from 1571
2. The Jerusalem Coffee House, Cornhill, London early 1800
3. The London Metals and Mining Co. 1877 (Initial metals: Copper and Tin)
Originate from the need to formalise trading into one market place with: • fixed trading times
• standard contracts specifications
• source of price ‘discovery’
4 The London Metal Exchange
New contracts have been added to the initial Copper and Tin, over the past ~100 years
1877 1920 1978 1979 1992 2002 2008 2010 2015 Copper Lead & Primary Nickel Aluminium NASAAC Steel Billet Cobalt & Aluminium & Tin Zinc Aluminium Alloy Molybdenum Premiums & Ferrous suite
Each year, the exchange reviews its contracts and looks to launch new products to meet the needs of the industry.
5 LME Volumes 2002 - 2015 In 2015, 169.6 million lots, down 4.3% from 2014, $11.9 trillion and 3.8 billion tonnes
6 LME Average Daily Turnover 670,189 lots on average per day in 2015
7 The LME is the leading metal exchange LME Share of exchange metal traded
2015 LME market share 100% 100% 100% 93% 92% 91% 90%
80% 74%
70% 64% 60% 60%
50%
40%
30%
20%
10%
0% AA Al Cu NA Ni Pb Sn Zn
8 Global commodity markets are down Only Tin is up since 2007 whilst lead is flat Losses as much as 72% Nickel and 87% Baltic Dry Index
300 Index 2007=100
250
200
Tin +58% 150
Lead +2% 100 Cu -18% Oil -25% 50 Al -44% Zinc -55% Nickel -73%
0 Baltic -87% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Copper 3 Month ($/mt) Nickel 3 Month ($/mt) Oil ($/bbl) Zinc ($/mt)
Aluminium 3 Month ($/mt) Baltic Dry Index Lead 3 Month ($/mt) Tin 3 Month ($/mt)
Data as of 14 April 2016 Source: LME, Bloomberg
9 Primary services of the LME
1 2 3
Pricing Hedging Delivery
Terminal Market
Price Convergence
10 A diverse marketplace
Smelters Consumers Recyclers Mining Merchants Cable, tube, and Recycling companies Smelter and Mining Companies Trading Houses automotive Scrap trading Refinery Companies companies companies
Protect margins Protect against Protect value of Protect value of Protect value of during smelting increasing material mining assets physical stocks metal content process costs
Orders Liquidity
Market Brokers Banks Investors Makers
11 Hedger vs. Financial Player
A Hedger starts with a price exposure, buys or sells futures contracts, and therefore offsets the price exposure.
A Financial Player starts without price exposure, buys or sells futures contracts, and takes on price exposure
12 The physical and paper market
Producer Consumer Physical Transaction
“Paper” Transaction “Paper” Transaction
Client Broker Broker Client
Client Broker Broker Client
Broker
Client
13 The Ring: global reference price The home of global metals markets since 1877
2016
1800s 2000s
1950s 1970s
14 The LME today Three venues providing execution choice
Ring Inter-office Select
~100 members, 43,000 customers
15 LME traded and cleared currencies
LME contracts trade in US Dollars LME contracts can also be cleared in the following currencies: • Euro • GB Sterling • Japanese Yen
• And in RMB when it becomes a freely tradable currency
16 Agenda
1 History, Purpose and Workings of the London Metal Exchange
2 LME Contracts and Prompt date structure
3 LME Warehousing and Reform
4 LMEshield
5 LME Liquidity Roadmap
6 Clearing
7 Conclusion
17 The LME contract Multiple benefits to using LME contracts
Clearing house guarantee Multiple Broker Execution • Cleared contract holders are • Ability to execute through and guaranteed financial hold positons with multiple settlement by LME Clear in brokers the event of a counterparty • Wide range of competitive default LME brokers Contract Transparent, reliable pricing Deepest liquidity • Fully transparent electronic • All market interest comes market together to form best market • Ability to participate in prices setting Official and Closing Prices
18 LME prompt date structure The LME’s prompt date structure runs daily for the first 3 months, then weekly until the end of the 6th month and then monthly out to 123 months, for Copper and Aluminium
Illustration of the three phases of the LME’s prompt date structure
1. Daily 2. Weekly 3. Monthly
Tomorrow 3M 6M 123M
Daily prompt dates: Weekly prompt dates: Monthly prompt dates: Cash to 3 Months Wednesdays , 3 months to 6 months 3rd Wednesday, 7 months to 123 months
3rd Wednesday (monthly) prompt dates are available in all months
Trading horizon for other metals: Lead, Nickel and Zinc out to 63 months, Aluminium Alloy and NASAAC out to 27 months, Tin, Steel Billet, Cobalt and Molybdenum out to 15 months
19 Rolling prompt dates
Tom Tomorrow’s date
Cash Two business days from today (sometimes called ‘Spot’)
3 months 3 calendar months from today
Two day settlement Contracts are closed two days prior to the prompt date and settled on the prompt date
20 LME and OTC markets
OTC LME Customisation Standardisation Credit Credit Opacity Transparency Counterparty risk Clearing Protection
21 Introducing Flex… Increased product flexibility with the benefits of exchange trading & clearing
OTC type transactions OTC LME Extended Customisation date structure Standardisation
Credit FLEX Transparency Opacity Clearing Protection Clearing Protection Counterparty risk Cost efficiency Credit Transparency Credit
22 Agenda
1 History, Purpose and Workings of the London Metal Exchange
2 LME Contracts and Prompt date structure
3 LME Warehousing and Reform
4 LMEshield
5 LME Liquidity Roadmap
6 Clearing
7 Conclusion
23 Warehouse Locations Over 650 warehouses approved by the LME - 14 countries, 35 locations & LME Shield with MOU to develop along Belt and Road routes
1. Antwerp, Belgium 10.Vlissingen, Netherlands Silk Road Economic Belt 2. Bremen, Germany 11.Barcelona, Spain Maritime Silk Road 3. Hamburg, Germany 12.Bilbao, Spain 4. Genoa, Italy 13.Helsingborg, Sweden 5. Leghorn, Italy 14.Hull, UK 6. Ravenna, Italy 15.Liverpool, UK 7. Trieste, Italy 1. Busan, South Korea 8. Moerdijk, Netherlands 2. Gwangyang, South Korea 9. Rotterdam, Netherlands 3. Incheon, South Korea
1. Nagoya, Japan 1. Baltimore, Maryland 2. Yokohama, Japan 2. Chicago, Illinois 3. Detroit, Michigan 4. Los Angeles, California 5. Mobile, Alabama 1. Kaohsiung, Taiwan 6. New Orleans, Louisiana 7. Owensboro, Kentucky 8. Panama City, Florida 9. St. Louis, Missouri 10.Toledo, Ohio
1. Dubai, UAE 1. Johor, Malaysia 2. Singapore 3. Port Klang, Malaysia
24 LME delivery: why?
Helps price convergence Price convergence between instills credibility in futures/physical the LME price
Why the need for possibility of delivery
LME delivery is not designed to replace Serves industry in times Physical market supply mechanism of over/under supply but to counteract irrational price signals
25 LME role in storage
LME does NOT LME does NOT buy or sell own storage facilities physical material
LME APPROVES locations and storage facilities
LME does NOT LME does NOT own transportation set rates for rents operations and handling
26 LME Warehouses - Deliveries In 2015, 2.23 million tonnes were delivered in and 3.77 million tonnes were delivered out
1,000,000
800,000
600,000
400,000
200,000
0 Tonnes
(200,000)
(400,000)
(600,000) Jul 2009 Jul 2010 Jul 2011 Jul 2012 Jul 2013 Jul 2014 Jul 2015 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013 Jan 2014 Jan 2015 Mar 2009 Mar 2012 Mar 2015 Mar 2010 Mar 2011 Mar 2013 Mar 2014 Nov 2009 Nov 2010 Nov 2011 Nov 2012 Nov 2013 Nov 2014 Nov 2015 Sep 2009 Sep 2010 Sep 2011 Sep 2012 Sep 2013 Sep 2014 Sep 2015 May 2009 May 2010 May 2011 May 2012 May 2013 May 2014 May 2015 Delivered In Delivered Out.
27 LME location approval process
Net consumption area Safe and or gateway well managed
Location approval
Logistically sound Politically conduit for the passage economically of material fiscally stable
28 Warehouse companies approval
Warehouse company: Warehouse: well established and structure and security experienced in handling of the building must relevant material be suitable
Listed warehouses
Facilities: access to necessary Good access to road, rail equipment checked for and water where required satisfactory operations
29 LME warehouse reform programme Reaching the conclusion of the delivery pathway
LILO Rule Best-practice information barrier policy
Enhanced LME investigation and action powers Commitments of Traders transparency for artificial queues Publication of queues and stock data by Creation of Physical Market Committee warehouse plus ongoing six-monthly reviews
Premium contracts (rule changes to facilitate Separate load-out rate for steel premium hedging solutions) delivered Already Legal review of the LME Warehouse Agreement Logistical review
Further load-out rate increase Separate load-out rate for aluminium alloys
16 - Cap rents in queues Due
May - 1
16 - Assess structural solutions to high charges Apr Paper Paper - 6 released released Discussion Discussion
30 Queue reduction following reform… Copper queues now believed to be entirely operational, whilst aluminium queues are steadily decreasing
900
800
700
600
500
400
300
200
100
0
Copper Primary Aluminium
Source: LME data
31 Discussion Paper items
Introduction of Fixed Converting the LME Warehouse Agreement from an “in FTA Term Warehouse perpetuity” model to a “fixed term” model, with annual or Agreements biennial reviews, with charge levels as a key parameter
Implementing a rule limiting Headline Warehousing CC Charge-Capping Charges (either for rent and FOTs, or just FOTs)
Charge Threshold Publishing, in respect of Headline Warehousing Charges, CTG Guidance thresholds or “shadow caps” as guidance
Monitoring Headline Warehousing Charges through the use Charge-Based of the LME’s powers in respect of incentive reporting and CBIG Incentive Guidance monitoring, likely against a published maximum charge schedule
Conversion of the LME contract from an “in-warehouse” contract (buyer pays FOT) to an “FOT-paid” contract (seller FOTC FOT Conversion pays FOT) – incentivises metal depositor to negotiate a competitive FOT
Options which impose a limitation Options which modify the LME ecosystem on Headline Warehousing Charges to reduce the drivers of high charges 32 Agenda
1 History, Purpose and Workings of the London Metal Exchange
2 LME Contracts and Prompt date structure
3 LME Warehousing and Reform
4 LMEshield
5 LME Liquidity Roadmap
6 Clearing
7 Conclusion
33 LMEshield A new service for all metal receipt users
Warehouses and Banks and financing Physical commodity commodity institutions traders and owners storage facilities
LMEshield
Improved global Reduced risk in Efficient processes Expanded trade off-warrant Reduced risk for trading across the market finance availability warehousing fraud commodities held standards on receipt
34 LMEshield – secure and effective commodity receipting
Rationale for LMEshield What is LMEshield? • 2001 – LME develops electronic system for • Secure global electronic register for efficient warranted-metals, ‘LMEsword’, with c. 5 million creation, management and transfer of off-warrant tonnes of metal delivered in and out annually warehouse receipts • 2014 – Post-Qingdao, leading banks request LME to extend services and expertise to off- warrant market • 2016 – Using experience gained from LMEsword and with support from commodity trading institutions LME will launch LMEshield
How can LMEshield help Recent developments 1. Ongoing engagement with working group of up Warehouses to 20 warehouses, banks and trading firms • Enhanced risk management, improved customer confidence, operational savings 2. MOU signed 21st March with Henry Bath, CMST Banks financing institutions and Mercuria to list LMEshield warehouses along China’s ‘The Belt and Road’ routes • Reduced risk of fraud and standardisation of receipt structure 3. April 2016 launch of LMEshield service Physical commodity traders and owners 4. Fee-free usage until September 2016, with • Transparent financing and efficient accrual of further credits for usage in period ownership transfer
35 Agenda
1 History, Purpose and Workings of the London Metal Exchange
2 LME Contracts and Prompt date structure
3 LME Warehousing and Reform
4 LMEshield
5 LME Liquidity Roadmap
6 Clearing
7 Conclusion
36 Liquidity Roadmap 2016 The Roadmap draws together the LME’s initiatives for enhanced market access and participation
37 Simplified access Different access options depending on users’ preferred mode of execution
Direct Market Access Membership • Multiple solutions available • 5 membership categories • Small operational overhead • From full Ring trading • Full control over execution privileges to non-clearing • As client or member membership • No need for UK domicile • Tailored to the operational Enhanced liquidity capacities and trading • Market making and other needs of users programmes to add liquidity across the curve
38 LMESelect Number of trades per hour
Asian market European market US market opens opens opens
39 Agenda
1 History, Purpose and Workings of the London Metal Exchange
2 LME Contracts and Prompt date structure
3 LME Warehousing and Reform
4 LMEshield
5 LME Liquidity Roadmap
6 Clearing
7 Conclusion
40 How Clearing Works
Futures contracts without a clearing house
Broker Y sells 1,000 tonnes to broker Z @ $5,000
Y Z
Futures contracts with a clearing house
Y sells to the Clearing House 1,000 The clearing house sells to Z 1,000 tonnes @ $5,000 tonnes @ $5,000 Clearing Y House Z
41 LME member default provisions
Companies Act has unique provisions for exchange traded contracts
LME and LME Clear act ahead of liquidator • LME Clear manages Exchange Contracts • LME manages Client Contracts – Client Contracts closed out at market price – Profits and losses netted – Positions transferred to other brokers
These provisions do not apply to OTC contracts
42 Agenda
1 History, Purpose and Workings of the London Metal Exchange
2 LME Contracts and Prompt date structure
3 LME Warehousing and Reform
4 LMEshield
5 LME Liquidity Roadmap
6 Clearing
7 Conclusion
43 LME: the world’s leading liquidity pool Part of a leading global, vertically integrated multi-asset class exchange group
Deep liquidity pools around the clock, with Liquidity enhanced market surveillance
Reference Global reference price, utilised for both prices on exchange and OTC markets
Transparency on positions and ongoing Transparency dialogue on governance and market developments
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Questions & Answers
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