LME must keep unique trading blend for sale to work

Fri Oct 21, 2011 5:05am EDT

* A takeover needs a philosophical alignment

* LME date structure difficult for some

By Pratima Desai

LONDON, Oct 21 (Reuters) - Leading London Metal Exchange shareholders will insist on retaining key elements of the 134-year old exchange's unique trading and business model as a condition to agree any sale, they told Reuters.

The LME offers standard one- and three-month contracts, but users can also trade daily out to three months and forwards are available for those who want to trade for several months or two to three years down the line. The range of LME trades has spawned a web of related trading structures worldwide.

Futures contracts are also physically deliverable, which when they mature can be converted into warrants, giving holders claim to material in warehouses approved by the exchange.

"One of the greatest fears among some of the membership is that whoever buys it will turn it into a monthly-settled cash market," a senior metals industry executive said.

"That would be like shooting yourself in the foot ... Some of the membership will need to be convinced that someone isn't going to come in and dismantle the existing structure."

The exchange in September restoked a global merger frenzy among bourses when it said it is considering a sale after receiving "several expressions of interest".

LME chief executive Martin Abbott has said that interest in the London Metal Exchange as a takeover target has snowballed and the number of suitors has risen to double digits.

Market speculation about potential buyers includes CME Group Inc , the largest futures exchange in the United States, IntercontinentalExchange and UK-based broker ICAP .

PHILOSOPHICAL ALIGNMENT

Singapore Exchange , the recently launched Hong Kong Mercantile Exchange, the London Stock Exchange , and Eurex owned by Deutsche Boerse have also been mentioned by metals sources.

"Most important to the membership is that in any discussions or merger the LME's model is protected. Philosophically there needs to be an alignment," a metals brokerage head said.

He, like others, spoke on condition of anonymity due to the sensitive nature of the potential sale.

"A huge industry around the world has been built on the basis of the LME's trading and warehousing model. It works well not just for the membership, but also for the whole of the metals market place."

Any deal would have to be accepted by 75 percent of shares. Major LME shareholders include companies such as U.S. banks Goldman Sachs and JP Morgan and trading firms including Amalgamated Metal Trading and Metdist.

The LME was established in 1877 above a hat shop in Lombard Court, and is now one of the last bastions of open outcry trading.

Sessions at the LME take place in a trading ring with red padded seats while visitors can watch from a gallery. Traders juggle multiple telephones and use archaic hand signals to fill orders from consumers, producers and hedge funds.

Some users such as banks and hedge funds would like the LME's structure to become more aligned with other commodity exchanges.

"There are people outside the industry that don't like the date structure because it's out of sync with most futures markets," one metal industry source said.

"There's definitely some of the investor part of the world that simply hates that system, very difficult to understand and get their heads around so you could get people proposing to change that to a set date to make it pretty much analogous to other futures."

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