The London Metal Exchange (LME) has proposed charging banks and brokers $1 a contract for over-the-counter trades that settle against its prices, as the biggest base-metals exchange works to reverse a slump in trading volumes.
Chief executive officer Matthew Chamberlain is seeking to close a gap in transaction costs for OTC and exchange-based trades that the bourse says has pushed trading onto rival platforms.
The LME has begun consulting members on the charge and plans to introduce it in April.
The new fee is aimed at financial dealers including banks like JPMorgan Chase & Co and Societe Generale, which run popular electronic OTC trading platforms, and brokers offering OTC derivatives as a cheaper alternative to the LME’s centrally cleared contracts.
Physical users and fund managers would be exempt from the charge, but costs may still be passed on to them, the LME said in a statement.
The LME’s internal estimates show the new fee could bring in $10mn a year in extra revenue, a person familiar with the matter said earlier this month. That’s based on the assumption that about 20mn contracts a year trade in the OTC market.
About half would be subject to exemptions from the new fee, said the person, who asked not to be identified because the discussions are private.
“The proposed financial OTC booking fee and related regulations are intended to bring greater fairness to the market,” Chamberlain said in an emailed statement. “The new fee would reduce the disparity between the fees charged for those members issuing their customers with LME client contracts and those issuing OTC contracts that use LME prices for a much lower fee.”
Chamberlain outlined plans to overhaul the LME’s fee model in September with a reduction in transaction fees for some key contracts that users said had become too expensive to trade, as well as the additional charge targeting OTC dealers who have profited from a quirk in the way trades are booked on the bourse.
That structure, known as a T4 booking model, means it’s cheaper for members to trade on the bourse than it is for their clients.
In cases where members write OTC contracts for clients and cover their own price risk on the bourse, the LME would receive $0.90 per contract. That compares with $2.70 per contract when the client’s trade is booked on the exchange, it said yesterday.
JPMorgan is likely to be hardest hit by the new fee, with other brokers likely to be affected including Triland Metals Ltd, owned by Mitsubishi Corp, and Koch Metals Trading, part of the billionaire Koch brothers’ business empire.
The LME is also consulting on new rules governing rival venues’ use of its prices and infrastructure. That would potentially include NFEx Markets, the trading platform being developed by several former LME staff including ex-CEO Martin Abbott. While the bourse said it recognises the value of private dealer-to-client platforms – such as the one run by JPMorgan – it flagged concerns that the “unchecked use of LME data and facilities” by third-party multi-dealer platforms could fragment liquidity and damage its commercial interests. Such platforms would need to seek “appropriate approvals” from the LME to use its prices or systems, it said.
The LME will consult members on the proposal until early February. The consultation process opens up the possibility that members will try to frustrate the process by subjecting the plans to legal review, but the LME is confident the levy and associated regulations are “fair and lawful,” Chamberlain said.
Traders stand outside the open outcry pit following a trading session at the London Metal Exchange. The LME has proposed charging banks and brokers $1 a contract for over-the-counter trades that settle against its prices, as the biggest base-metals exchange works to reverse a slump in trading volumes.
