EU market reforms mean added costs for metals industry - LME
* EMIR reform to increase costs for end users
* Still not clear how many OTC metals products will be hit
* LME upgrading its systems, expects more business flows
By Maytaal Angel
LONDON, Feb 21 (Reuters) - The European Union's drive for over-the-counter (OTC) financial derivatives to go through a so-called clearing process spells added compliance costs for the metals industry, the London Metal Exchange's (LME) deputy chief executive said on Thursday.
The EU's European Market Infrastructure Regulation (EMIR) was introduced in August, but is being phased in this year. EMIR rules the OTC or off-exchange financial derivatives market, worth an estimated $648 trillion globally, must be cleared by a central counterparty and reported to a trade repository.
It is part of a suite of reforms aimed at making financial markets safer in the wake of the 2008 financial crisis.
"A lot of these regulations are going to increase the cost of doing business. With EMIR, ultimately the end-user will be paying. Brokers ... I have no idea how it will work out for them," LME deputy chief executive Diarmuid O'Hegarty said at a news conference.
"One of the consequences of EMIR is clients will be given the option of having individually segregated accounts. They will also have the right to port to another broker if their broker goes bust. But all this is going to cost money."
Parts of these markets were heavily implicated in the financial crisis when the credit default swaps market imploded, and it is expected that regulators will initially focus on OTC financial derivatives.
In commodities, it is expected they will first turn their attention to more liquid, standardised markets such as energy swaps, some of which have already been brought onto clearing.
For metals, it is unclear as yet how many OTC products might be brought onto clearing under EMIR, though the LME is in any case getting its technical and business structures ready for the onslaught of additional data it will have to process.
"In metals, you have OTC business between a broker and a client. Metal premiums can be considered swaps. But for something to be traded it needs to be standardised and liquid. The clearing house has to be able to manage the risk," said O'Hegarty.
O'Hegarty also expects that while EMIR reforms will mean extra costs for the LME, these will be more than offset by the increased business flows that will move onto the exchange, or onto the clearing house it is currently setting up. (Reporting by Maytaal Angel; Editing by Mark Potter)
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