October 13, 2010 / 8:50 AM / 9 years ago

Base metals ETFs subject to exchange guidance - LME

LONDON (Reuters) - Large physical base-metals positions held by exchange traded products could be subject to the London Metal Exchange lending guidelines, LME Chief Executive Martin Abbott said on Tuesday.

His comments follow an announcement by UK-based ETF Securities on Monday that it would launch exchange-traded products (ETFs) for base metals.

Abbott said there was concern that ETFs, if they are successful, will lead to metal being diverted away from the normal supply chain and therefore acting as a distortion on the price.

“The exchange cannot regulate deals and stockpiles that arise outside its trading venues and away from its warehouse network,” Abbot said at the LME’s annual dinner in London.

“What the exchange does do, and will obviously continue to do — is to regulate the behaviour of positions held within its system.”

The LME has the power to step in and force longs to lend by imposing its lending guidelines, which are aimed at ensuring orderly markets.

Under these guidelines, if an LME member or client holds 50 percent or more of the warrants or cash today/cash positions, it should be prepared to lend at a premium that is no more than half a percent of the cash price for a day.


Abbott also said an independent study into LME warehouses would be undertaken by London-based consultants Europe Economics into the validity of load-out requirement.

Metals investors have expressed concerns about the speed at which LME registered warehouses can deliver out material, as well as possible conflicts of interest of warehouse owners.

At its half-year update in late July, the LME said it would commission an independent survey of its warehouses, looking particularly at load-out operations.

“It is not the LME’s role, nor does it have the power, to determine who owns warehousing companies,” Abbott said. “What the LME does do is work hard at making sure that the owners of warehousing companies operate them in compliance with the LME rules.”

“More of our warehousing companies are now owned by member or trading companies but from our perspective that does not change very much — we have been dealing with this particular potential conflict and the issues that emanate from it for decades,” he added.

Abbott said the LME had warehouses throughout Asia, and that they plan to add another location.


In late July, the LME merged its two regional steel billet contracts to create a global one under the Mediterranean contract.

“We have seen an unbroken run of record trading months since January, with almost two million tonnes trading in September alone,” Abbott said.

The exchange also launched futures contracts for steel material molybdenum and cobalt, which is used to make aero engines and batteries for hybrid cars, on February 22.

“Their performance is tracking well since launch and...in the case of the moly contract we are learning about something new — the storage and trading of concentrates,” Abbott said.

Abbott was also positive about clearing for the over-the-counter (OTC) wholesale London gold market with LCH.Clearnet, which is due to launch in November.

“It is no secret that both LME and LCH see an extension of the clearing service into the other OTC precious markets in London as a natural next step and I look forward to reporting material progress in coming months,” he said.

Editing by Sue Thomas

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