LME to introduce OTC reporting, accountability levels despite members' concerns

The London Metal Exchange is to introduce a weekly over-the-counter (OTC) position reporting framework for all its physically delivered metals to enhance market trade visibility, effective July 18, despite members' reservations, the LME said June 17.

It will also extend accountability levels to OTC positions from the same date, it said in a statement.

The steps follow consultation with the exchange's market users: however the majority of respondents expressed concerns over the new measures, the LME said.

From July 18 the LME therefore withdraws the existing requirement to daily report OTC nickel positions, introduced March 14, it added.

The planned introduction of the new regulations follows widespread criticism of the exchange's lack of adequate market oversight in the run-up to a speculative play by a single investor in nickel trading in early March, which led LME nickel prices to soar 250% in just three days to more than $100,000/mt before trading in the metal was suspended March 8 for over a week.

Cancellation of an estimated $3.9 billion-worth of nickel trades made just before the market suspension angered market players, some of whom have since filed court action demanding compensation for monies lost.

The steps now to be taken in "enhancement of the LME's visibility of OTC markets is, we believe, in the interests of the market as a whole and will improve our ability to oversee activity holistically, ensuring future market stability and continued compliance with our regulatory obligations," an LME spokesperson said June 17.

The new regulation will oblige members to report all OTC positions in aluminum, aluminum alloy, cobalt, copper, lead, NASAAC, nickel, tin and zinc on a weekly basis with no minimum position size threshold. This will provide the LME with timely visibility of significant positions in the OTC market, it said.

The LME's analytical capabilities regarding this data will initially be limited by a lack of historical data, the manual nature of submission, and the short implementation timelines, it noted. However, the LME will continue to increase its capabilities that will improve its analysis of OTC data over time, it said.

Price bands

The LME also acted to ensure greater market stability by introducing upper and lower price limits to guarantee orderly trading when its nickel trading reopened March 16 following the suspension. Price limits were also applied to other non-ferrous metals trading on the LME, in a move well-accepted by the market, the LME has said.

Price bands to prevent extreme volatility had already been in operation on steel and metals trading at other exchanges including Shanghai Futures Exchange and CME.

Both ferrous and non-ferrous metals prices have historically shown volatility due to the global nature of their trade and susceptibility to geopolitical changes. This volatility however became extreme in the weeks immediately after Russia's Feb. 24 invasion of Ukraine, as sanctions against Russia sparked supply concerns. Russia has typically supplied 15% of the world's battery-grade nickel.

Members' reporting reservations

The LME said in its June 17 statement it had received 27 timely responses to its consultation on OTC reporting. While generally supportive of ensuring fair and orderly market operation, a majority of respondents had concerns about the practicality or form of reporting and how the information might be used, it said. Some respondents felt it might make more sense to wait until the publication of an independent review and other analysis of the LME's nickel market troubles: regulatory reviews were announced by the Financial Conduct Authority and Bank of England April 4.

The exchange said that despite members' individual reservations, it has decided to go ahead with prompt introduction of the OTC reporting regulation in the interest of the market as a whole, as any relevant review finding could be considered and factored into the LME's plans in due course. OTC data must be reported to the exchange in encrypted form to ensure client confidentiality, it said.

In the event a member holds no OTC positions, it should confirm this via submission of a nil file return, to ensure that the information available to the LME is as complete as possible. Category 5 members who do not hold positions directly (but only indirectly through another member) will not be directly subject to the reporting obligation in the weekly OTC position reporting proposal.

"The LME will not delay taking appropriate actions," it stated. "The LME believes that the benefits to the market of receiving regular OTC data to monitor trading in instruments linked to the LME are such that it would be inappropriate to delay the Proposal. The Proposal will further assist the LME to reduce the risk of the occurrence of disorderly trading conditions on its market, in line with the LME's regulatory obligations, in the context of recent events in the LME Nickel market which have demonstrated the effects that OTC activity can have on the wider LME market," it said.

A consultation last year on whether regular OTC reporting should be made compulsory at the LME had also not found approval from the majority of members, a spokesperson noted earlier this year.