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LME approves changes to warehousing policy

The board of the London Metal Exchange (LME) has approved the proposed changes to its warehousing policy designed to cut queues at warehouses, following a three-month consultation with the global metals industry.

The LME has closely engaged with the FCA to ensure that the changes are consistent with the LME's regulatory requirements.
"As the world's leading base metals exchange, the LME has a duty to the entire metals community to run a fair and orderly market. We had a responsibility to examine concerns raised about lengthy warehousing queues, as these pose a range of issues in terms of price discovery and price convergence as well as the use of the market for effective hedging," says Garry Jones, chief executive of the LME.
"The LME wishes to thank all the individual companies and industry groups who made time to respond to the proposal. While the feedback we received over the three-month consultation period was varied and at times polarised, we believe that the amended proposal is, on balance, the best solution for all market users.
"Having carried out a rigorous and in-depth market engagement programme involving over 70 meetings and more than 30 written responses we now call on all market participants to move forward under these new rules, which we believe best balance the needs of all LME stakeholders."
Some modifications have been made to the proposal in accordance with market feedback. The initial proposal targeted warehouses with queues of more than 100 days, but as a result of the consultation the threshold has been reduced to 50 days, allowing the LME to better deliver a market of last resort to physical metals users.
Additionally, the LME will investigate and act to prevent warehouse companies unreasonably incentivising the formation of queues.
The proposal operates by measuring all of the metal loaded into a warehouse over a three-month period. If there is a queue of more than 50 calendar days the affected warehouse would be expected to deliver out additional metal based on a formula.
For example, a warehouse currently required to deliver out a daily tonnage of 3,000 tonnes would, under the proposal, need to load out at least 1,500 tonnes per day more than it loads in. Additionally, if the current load-in rate of an affected warehouse exceeds the minimum load-out rate, then the warehouse would be required to deliver out tonnage equal to that excess.
The LME has also agreed to further enhance the existing physical network in a number of ways. The LME will commission a full external logistical review of LME warehousing to address issues raised regarding reasonable operational expectations and requirements, and also to review its warehousing agreement.
In addition, the LME will create a new physical market committee to provide the physical community with enhanced representation in the LME's governance structures. The LME's warehousing system will continue to be reviewed every six months and the new committee will play a substantial role in this process.
Alongside these measures, the LME has committed to reaffirm its policy on information barriers by informing the market on an annual basis once it has received the third party audits carried out on warehouse operators who are required to have information barriers in place, and identifying any general issues that may arise from this process. The LME also plans to investigate the viability of introducing products linked to premium price discovery and hedging, although such products are seen as complementary to the new policy targeting queues.
The LME intends to provide new delayed data on a per-warehouse basis and, separately, to look at publishing a "commitment of traders" report in response to market demand.
While the implementation of certain elements of the new rules will require further discussion with warehouse companies in accordance with the terms of the warehouse agreement, it is not anticipated that this will delay implementation as planned on 1 April 2014.
The LME will update the market about the additional proposals and reviews as and when further progress has been made.

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