INTERVIEW: LME modifying technology to allow for multiple contract launches this year, CEO says

Mar 15, 2018 - 9:00 AM GMT
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The London Metal Exchange is modifying its technology to allow it to launch multiple contracts at once, something it plans to do at the end of the year, according to the exchange’s chief executive officer.

Matthew Chamberlain said that the move, designed to add a level of dynamism to the LME’s systems, would delink the launch of new contracts from the release of new technology.

The exchange is then aiming to launch up to six contracts in one go by year-end, dependent on regulatory approvals and the readiness of members, he told Metal Bulletin in an interview.

“From a technological implementation perspective, what we’re doing is updating our systems such that they can be dynamic, so we don’t have to introduce new contracts as part of a systems release – instead we can just do it by adding the contracts in, which is what a lot of our competitors can do,” he said.

“The big piece of work this year is to make the systems dynamic in that way. What we want to do is to delink the launching of contracts from technology,” he added.

According to Chamberlain, the problem facing the LME in the past has been the fact that contract launches have been inextricably linked to technology.

“We’ve had to commit to a hard launch date but then the members aren’t ready and we’ve had to move the date around. The art here is to give ourselves the ability to launch contracts as a configuration matter rather than a full technology build,” he added.

Although no specific timeframe has been set – “We’re taking a little bit of time rather than add contracts one by one, to give us the full dynamic implementation, but certainly the plan is for that to happen this year” – Chamberlain said the goal is to launch five or six contracts on day one, “and be able to add more as we go.”

Aside from reducing the time and cost constraints of regular technology overhauls, the move would also give the LME the ability to be more exploratory in its approach to new contracts, Chamberlain said.

For instance, the LME has been asked to consider launching cash-settled aluminium premiums, he noted.

“Previously that’s not something we would have done because we don’t think the size of that market – given what we’ve seen trading on other exchanges – justifies it. But if we can do it for a very limited investment, then why not react to what people are asking us to do?” he said.

“Sometimes people ask you to launch a contract and then don’t trade it – we’ve had that experience with premium contracts before – but if it costs you nothing to do, you don’t mind,” he told Metal Bulletin.

“Indeed, you don’t look silly because you moved towards a model like a number of our competitors where you’re willing to take the risk. Some contracts will work and some won’t, but you embrace that model. It’s a bit of a change in philosophy for the market, and for ourselves as well,” Chamberlain added.

According to Chamberlain, typically the LME has been overly concerned about the performance of any one individual contact, instead of being focused on the performance of its entire suite of contracts.

New contracts

Top of its list for new contracts are gold and silver options. The exchange already offers gold and silver futures contracts, having launched them in July in partnership with the World Gold Council (WGC) and financial institutions including Goldman Sachs, ICBC Standard Bank, Morgan Stanley, Natixis, OSTC and Société Générale.

“When we spoke to our partners they felt that gold and silver options were the more pressing markets for us to look at launching contracts for. We’ll be doing that first, but we also need our partners to be ready, to make markets in it,” Chamberlain said. “We’re also already talking to the key platinum group metals participants,” he added.

The LME recently hired Robin Martin, formerly managing director for market infrastructure at the WGC, as its new head of market development, a move Chamberlain said was a sign of the exchange’s commitment to the precious metals market.

The exchange is also looking at a cash-settled lithium contract, tapping into the trend towards electric vehicles and the electrification of mobility, although the lack of a dominant benchmark means the first step will be to determine a price the industry is willing to work with.

“If we simply list a contract to a price, it’s not going to get any traction unless it’s the price that everyone is using,” Chamberlain added.

The LME has put together a consortium including automotive and battery manufacturers, as well as lithium miners, and the first task it set itself was a Request for Proposal in order to understand better the pricing options for a contract and determine which will work best or the industry.

“It’s an appropriate first step to show we’ll work with the market, and hopefully the upside for us is that we can then launch a contract to that price as and when it gets traction,” Chamberlain told Metal Bulletin. There is strong industry buy-in; Chamberlain said: “It’s one of those nice times when there seems to be alignment across the value chain that hedging is a desirable outcome.”

The LME is meanwhile looking at launching a new cash-settled cobalt contract, also a key component of battery materials for electric vehicles.

Unlike lithium, there are two pricing benchmarks – the LME and Metal Bulletin.

Metal Bulletin’s cobalt low and high grade prices converged last week and have risen further since, with both assessed at $40.40-41.95 per lb on Wednesday March 14.

“Probably if you look at total volume of contracts priced, MB is the bigger one. We understand it’s a market where consumers and producers have differing views on benchmarks and it’s unlikely we’ll be converting the entire market to LME pricing – and I’m not sure that’s our role,” said Chamberlain.

“We like people using LME pricing but we have said we’ll be driven by the market and to sit here and say that you must use LME pricing is just not right. Indeed it’s inconsistent with what we’ve done on steel, using third-party benchmark providers,” Chamberlain added.

The LME plans to retain its existing physically-settled cobalt contract; “People have committed to it, have spent a lot of time on it, price off it, warehouse it. Nobody feels there’s anything fundamentally wrong with it (so it won’t be changed further) – adding the powder specification was very helpful,” he noted.

But there is work to do over conflict minerals, with a vast proportion of cobalt being produced in the Democratic Republic of the Congo, where there have been allegations of child labor and appalling working conditions.

“We’re conscious of the fact a lot is happening in cobalt and our physically-settled model requires a list of brands so we’ll be looked to as the arbiter of which brands are acceptable and which aren’t. We will be coming out with some thoughts to the market on that reasonably soon,” Chamberlain said.

“We will continue to support the physically-settled contract as long as people continue to use it and continue to invest in it, but we shouldn’t be so arrogant as to say we can’t also launch a contract based on another benchmark that people felt was appropriate,” he added.

After being approached by nickel and battery materials participants to consider a nickel sulfate contract, further discussions with the sector revealed the existing nickel contract did the job and the exchange abandoned the idea. A similar situation resulted in the decision not to pursue a cobalt sulfate contract, Chamberlain said.

Alumina is under consideration – ”I don’t know whether the alumina market will fall into exchange pricing, but if it does, we want to be there” – and the exchange plans to convert the molybdenum contract to cash-settled from physically-delivered currently to revive interest.

Chamberlain said he is “very confident” about regional contracts in hot-rolled coil (HRC). “A lot of people trading our scrap and rebar contracts have told us they’d do HRC, and frankly those guys have the credibility to make that statement because they’re putting big volumes through our existing contracts,” he added.