London Metal Exchange had quite a year in 2014.
From its integration into the Hong Kong Exchanges & Clearing, launching its own clearinghouse, and addressing the metals warehousing problems, LME has the pieces in place for expansion. Garry Jones, CEO of the LME spoke with John Lothian News about the exchange’s focus on China and the potential for new products in the coming months.
LME launched its own clearing house last September and has brought its technology in-house, under the HKFE. All of that has added staff to LME, tripling its payroll over the past three years, as well as a new building set to open later in the year.
“There’s two main themes for the LME,” he said. “Our business, given that 40 percent of the world’s metals production and consumption is in China, we’re focused on that as well.”
As such, Jones said all of these moves over the past year or more will help the exchange branch off, well beyond the traditional base-metals space it has occupied during its history. So our two lines and two themes, if you like, are geographical. We continue to try and increase Asian participation in our markets.”
LME now derives about 20 percent of its volume from the Asian time zone, outside the European trading hours and each week, he said LME is bringing on new participants from China. The second part of the strategy is new products.
“We’re looking to get into new markets, we’re looking at precious metals, we’re looking at ferrous markets,” he said. “We’re looking at premium contracts. So there’s a whole load of stuff going on.”
The exchange has also been tangled in legal battles over LME warehouses, which have been under attack from end users over fees and manipulation of metal inventories by member firms. LME’s solutions to the problem have eased the backlog of metals in all but one warehouses and the exchange has won three legal suits against it so far.
“These cues are not a problem in isolation,” he said. “These cues began back after the financial crisis in ’08 and ’09, quantitative easing, low interest rates. When it became apparent you could store material in a warehouse at .5 percent and lock in the 2-year forward, a positive carry for a risk-free rate in US Treasuries, of course, people were going to do it. Of course, producers were not going to close mines and smelters if they could help it, so anything they could do to keep it off the market, they will do.”
Jones said his exchange has tried to take on the problem, despite the chorus of voices that have demanded changes to the warehousing system.
“These problems are fairly new and we have to deal with them,” he said. “So, we’re not saying there isn’t a problem. Our goal is to make sure we have a liquid, efficient market that meets regulatory requirements. And we can’t change the rules because we feel like it.”
On the regulatory front, Jones said that LME is trying to deal with the ongoing rollout of rules from MIFID, EMIR, MIFIR and other regulatory agencies globally. New products, he said, from concept to regulatory approval now take about nine months.
“Some of it is good,” he said. “We always say, “More good regulation instead of just more regulation.” I’m afraid some of the European regulation at times just adds cost, and does it make it a better market? I’m not so sure.”
Jones said 2015 is a very big year for the exchange, especially as it brought in a new fee structure earlier this year.
“It’s really delivering, in the full sense of the word, what we’ve already started,” he said.