* LME discussion paper due in late April/early May
* Expected to include option of monthly futures for base
* Reformers look to gold contracts as model
* Falling volumes raise pressure to change
By Peter Hobson and Pratima Desai
LONDON, April 11 The London Metal Exchange (LME)
is considering reforming its complex structure of trading to
lure funds and reverse falling volumes, laying bare a schism
between those wanting change and core traditional members who do
By early next month, the 140-year-old British institution
that sets global benchmark prices for industrial metals such as
copper and aluminium will publish a discussion paper that is
expected to include the offer of a simpler alternative to its
intricate three-month date structure, sources say.
A hike in trading fees two years ago drove many LME regulars
to the over-the-counter markets, precipitating a 7.7 percent
fall in trading volumes last year and 4.3 percent the year
before and forcing the exchange to consider its future.
Dwindling volumes have undermined profits at parent Hong
Kong Exchanges & Clearing Ltd (HKEx), which paid $2.2
billion for the LME in 2012 and is still trying to recoup on its
"Growth has to come from speculators," a source at a
London-based brokerage said. "They are going to have to come out
with something new, they can't just keep tinkering around the
That something new, metal industry sources say, could be
modelled on the exchange's new precious metal contracts due to
go live in June.
Its mix of daily and monthly gold and silver contracts aims
to allow industrial users to hedge specific dates. But its
standardised monthly future would also appeal to funds, allowing
them to settle a trade as soon as it is closed, much like
futures on other exchanges such as the CME.
"There are people who want futures and there are people who
want to leave things as they are," the head of a commodities
brokerage said. "A lot of our clients are real hedgers so the
date structure has a value for us, but some of our clients are
financial and they would prefer futures."
The LME will seek feedback on the discussion paper before
implementing any changes.
"We are committed to broad engagement with our stakeholders,
to understand their perspectives, and to map out a development
path for the LME which evolves together with the needs of our
users," the LME said.
"We will only make changes where and when we believe these
to be in the best interests of the whole market."
'BREAD AND BUTTER'
Traditional members fret that adding more industrial metals
contracts will erode liquidity for the three-month forward
contracts that are traded in the open-outcry ring, risking the
exchange's position as global benchmark setter.
"They need to understand we, and the three-month contracts,
are their bread and butter, we are their core audience, they
can't have everything," one brokerage head said.
"Taking liquidity away from the three-months could impact
their use as global benchmarks, without which the LME becomes
like any other exchange."
Liquidity on the LME is concentrated in the rolling
three-month forward contracts, based on the time it took to ship
copper from Chile to London in the 19th century, which allow
industrial users to lock in prices on a specific day.
But it is costly and complex for financial investors.
For example, a fund wanting to bet on higher prices can buy
the three-month contract today and when it sells, perhaps a few
days later, it must reconcile the two dates with a separate
That requires three transactions and three lots of fees.
Matching the dates has to be done through a broker, and the
forward contract requires investors to wait until its expiration
date to settle their accounts.
Speaking at a briefing this year, HKEx chief executive
Charles Li said: "It's really about making our system easier,
making our trading platform more friendly, (so) completely new
people can find it easier."
The LME has already tried to make trading easier for funds
by trying to boost liquidity on Select, its electronic trading
system, for monthly forward contracts, which settle on the third
Wednesday of each month, with incentives such as discounts for
The monthly forwards are only two transactions, both of
which could be done on Select. But liquidity is lacking, sources
"With the third Wednesday contract, your money is not
unlocked until settlement," a U.S.-based investor said. "They
need to go one step further – offer futures. On COMEX,
when I want to buy copper, a few clicks and it's in my account,
if I want to sell tomorrow a few more clicks and it's done."
(Editing by Susan Thomas)