LONDON (Reuters) - The London Metal Exchange (LME) is confident that banks will not try to evade its new fee on over-the-counter (OTC) trades that reference LME prices, which is likely to be $1 per equivalent contract, its chief executive said on Tuesday.
The 140-year-old exchange last month announced it would start charging a new OTC fee in January balanced by cuts of other fees crucial to its physical user base designed to lure back volumes.
“We know that they are compliant organizations ... also quite heavily regulated institutions,” CEO Matt Chamberlain told the Reuters Global Commodities Summit. “Their own internal compliance guys are making sure their reporting is accurate.”
An official consultation will be held in November about the new fee, which will be applied through the LME rule book and its data licensing agreement. Non-compliance with the rule book is a disciplinary breach.
Some metals trading volumes have migrated to OTC deals, partially triggered by large hikes in LME trading fees in 2015 that were introduced to lift profits for its owner, Hong Kong Exchanges and Clearing Ltd..
The LME said last month it was only fair that banks structuring their own OTC deals using LME prices as a reference should pay a fee, but some people were skeptical that the LME could track down all the OTC business.
The LME has not finalised the level of the OTC fee, which will take effect on Jan. 1, but it is likely to be what was flagged in its September announcement - $1 per equivalent LME contract.
“We put an indicative figure in the Strategic Pathway document and we haven’t heard a lot to suggest that that’s the wrong number,” Chamberlain said.
OTC fees would not be charged to miners or consumers who use LME prices to structure a physical supply contract.
The LME, the world’s oldest and largest industrial metals market, is counting on the new OTC fees to help offset lost revenue from sharp cuts in other fees.
The LME cut short-dated carry fees from Oct. 1 and will reduce medium-dated carry fees from Nov. 1 . Short-dated trades or carries are those between one and 15 calendar days ahead while medium-dated trades are up to 35 days forward.
Chamberlain does not expect the LME to recoup all of its lost volume, but believes the exchange should see a difference by early next year.
“It might be you don’t see the behavior change for a few months because there’s a lag effect as people hopefully change their trading activity,” he said.
“If you ask my personal view, it will come more from the month-to-month rolls than from the front end.”
A combination of the new OTC fees, potentially higher volumes and extra business from new contracts is expected to lift LME turnover.
“Between those three drivers, we aim to be back to our historic level of revenue within two or three years,” he said.
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Additional reporting by Pratima Desai; Editing by Veronica Brown and David Evans