* Funds prefer the CME's more easily traded copper contract
* LME needs fund business to expand volumes
* LME paper lists options for promoting monthly contracts
By Pratima Desai and Peter Hobson
LONDON, May 12 The London Metal Exchange (LME)
is intent on enticing more investors to halt a slide in trading
volumes, but users fear its plans could cause further erosion
and even shake the foundations of its benchmark contracts.
The 140-year-old exchange is battling to reverse declines
triggered by large increases in trading fees in 2015 and an
economic slowdown in China, which accounts for nearly half of
global consumption of base metals.
While it remains a dominant force in global markets, rival
CME has been encroaching on its territory.
Copper volumes in the first four months of 2017 on the CME
Group leapt 21 percent over the same period last year,
while the LME posted a drop of more than 7 percent.
This is mainly because many funds prefer the CME's copper
contract as it can be bought, sold and settled in one day.
The LME's benchmark three-month contracts - the lifeblood of
the market - are used as reference prices in contracts around
the world by traders, consumers and producers for buying and
selling copper, aluminium, zinc, lead and nickel.
"We use the LME because it has liquidity for all the metals
we trade, not just copper," a fund manager focused on natural
"The structure is not a problem for us, the accounting
aspects are. I have to carry all positions to maturity on my
balance sheet, it ties up capital."
Growth in the physical market peaked some years ago, so the
exchange needs to look elsewhere to boost revenues for parent
Hong Kong Exchanges & Clearing Ltd, which paid $2.2
billion for the LME in 2012.
To facilitate a boost in volumes, the LME last month
published a discussion paper listing alternatives to the status
New LME Chief Executive Matt Chamberlain favours the option
of extrapolating prices for three-month contracts and carry
trades to populate the monthly contracts on its electronic
The exchange favours a technique called implied pricing to
extrapolate synthetic prices for contracts that mature on the
third Wednesday of each month from trading activity on other
It hopes the idea can spread liquidity from its rolling
three-month contracts to monthly dates that fund investors find
easier to trade.
WHERE CARRY IS KEY
A fund wanting to bet on higher prices on the LME buys the
three-month contract today and when it sells, perhaps a few days
later, has to reconcile the two dates with another transaction
known as the carry trade.
These carry trades occur at random dates in the future and
are covered separately. If the monthly contracts became the most
liquid, only the average exposure would be traded on the LME.
One broker estimated that if his carrys over the next three
months totalled 9,000 lots, averaging would leave only about 900
going through the LME. "At $2.70 per lot that's roughly a
revenue loss of $22,000 in fees."
Loss of volume on the three-month forwards is also expected
by banks and brokers, which already offer funds monthly prices
calculated using three-month contracts and carry trades.
A metals trading source at a bank said the "downside" was
loss of volume on the three-month contracts. "Moving to the
monthlies is a risky proposition because you become
interchangeable with the CME."
The head of a metals brokerage said: "It risks the benchmark
status of the three-months, a unique selling point."
But, the bank source said, the LME was under pressure to
boost volumes, which last year tumbled 7.7 percent.
"An alternative would be to create liquidity points for the
third Wednesday of the front month, the second month and the
third month, which would help keep the date structure and the
carry trades," metals industry veteran Jeremy Goldwyn said.
"The nuclear option of going solely to monthly dates would
mean the carries market disappears and shreds volumes."
An LME spokeswoman said the exchange was aware of a "broad
spectrum of views in the market on the subject of monthly
"The exchange ... looks forward to receiving feedback from
all segments of the market on this topic and formulating a clear
strategy that takes account of the views of its user base."
(Editing by Veronica Brown and Dale Hudson)