Two financial industry groups have voiced concerns with the London Metal Exchange (LME) regarding its plans to mandate that private transactions between members and clients take place on its own platform, according to five sources familiar with the situation.
The LME is looking to have its members conduct over-the-counter (OTC) trades of up to 10 lots (equivalent to 250 metric tons of copper, for instance) on its Select trading system, along with hedging such trades on Select. This differs from COMEX, a part of the U.S.-based CME Group, which does not require its members to execute OTC trades on its systems.
The Futures Industry Association (FIA) and the Association for Financial Markets in Europe (AFME) jointly penned a letter to the LME outlining members' concerns in December as an unusual move following a meeting with LME members.
We acknowledge the LME's ongoing efforts to enhance transparency and market structure and are engaging positively with them regarding relevant proposals, AFME and FIA noted in response to a comment request.
Additionally, three sources mentioned that LME members have also raised the issue with the U.K.'s Financial Conduct Authority (FCA), but the regulator declined to comment on this matter or confirm if they were consulted about the LME's plans.
The LME stated that its goal is to boost transparency and liquidity and invited feedback "from all LME stakeholders" on a market structure modernization plan revealed in September, expressing confidence that the intended measures will benefit the overall market.
The LME later disclosed that full details of the proposed changes will be presented and formally discussed in the first half of 2025 after initially issuing a white paper on its suggestions, intending to seek views on adjustments to its Rulebook necessary to implement these proposals.
Among other concerns, industry sources indicate that members are urging the LME to reconsider its requirement for members to handle OTC orders for its most liquid three-month and monthly contracts of up to 10 lots on Select starting from the second half of 2025.
Moreover, members seek clarification on how the 10-lot threshold was determined, expressing fears that the limit may escalate over time to attract more OTC trades.
A suggestion that OTC contracts below 10 lots using LME prices must be hedged on its internal system has prompted speculations that the LME may be attempting to restrict brokers and banks from netting their buy and sell orders internally and prevent them from hedging on other exchanges like COMEX.