Garry Jones: LME’s Man of Steel … And Base Metals

Jim Kharouf

Jim Kharouf


Garry Jones took the reins of the London Metal Exchange (LME) at the end of September. Just over a week into the job, he spoke with John Lothian News editor-in-chief Jim Kharouf about the LME’s next steps, what’s happening with the controversial warehouse issue, CME’s aluminum challenge and how LME’s parent company Hong Kong Exchanges & Clearing can become a metals powerhouse in Asia.

Q: You’ve been on the job for just a few days. How does the LME/HKEx compare to the structure at NYSE LIFFE?

A: It’s different but some things are the same. When I was at NYSE Euronext, we did a deep dive into the London Metal Exchange as one of the bidders. The difference is that Hong Kong Exchanges has been successful in specific asset classes. They run a world class business in Hong Kong and this is their first real stab into a different asset class.

At NYSE LIFFE, the focus was on fixed income and equities. In this case, with Hong Kong buying LME, they are gaining commodities expertise by acquisition of the metals business which can help them expand into other asset classes.

Management here is very supportive and appreciative. And I’m also co-head of markets in Hong Kong and head of the LME. We have three clearing houses in Hong Kong and we’re building a new one here in London to go live in September 2014.

I’ve been given full access to the governance structures internally, so I think they know what they are getting themselves into and we have their full support.

Q: Many are wondering just how HKEx is going to unlock the value on LME that wasn’t there before. Can you articulate that vision or strategy?

A: There are two pieces to the first part. How would you look at the franchise value of the LME? How can it expand and grow the business? With LME, Hong Kong has the ability to expand the business in Asia and China in particular at a faster rate. There are structural issues there but with Hong Kong, we have strong links to China. We talk to the Chinese exchanges and regulators regularly. So number one is, to increase the value of the franchise.

Number two is, how do we increase the number of users and broaden that user base? Some of that answer means we need better technology, more remote access, greater bandwidth, stronger options spreading and so on.

The third thing is using the commodities experience in the metals market to start markets in Hong Kong itself, in the Asian time zone. I think we can denominate these contracts in a number of currencies including China’s renminbi. And from that perspective, if in a couple years we’ve expanded the LME’s business geographically and by product, we’ll have made real progress in becoming an Asian commodities exchange. At the moment in Asia, the commodities market is very fragmented and we’d like to be one of the main hubs for trading in Hong Kong, including clearing both OTC and listed products and commodities. And that adds a lot of value as well. That’s part of the organic growth part, apart from the acquisition part which is the LME.

Q: What is your priority list for LME?

A: One is structural. We have significant projects underway to in-source all of our technology. We have outsourced our technology. At the same time, we’re upgrading many of our systems we’re reviewing our data center strategy, building our clearing house. That is a lot of things right there. That’s a high priority.

The second is to come up with a new strategic plan for where we are and where we should be. On the consultation we’ve done around the warehouse issue has been an important part of that. But also, we’re meeting with all the players in the value chain – producers, smelters, merchants, brokers and dealers, real end users and those who invest in metals as an asset such as hedge funds, and  investors. And you realize it’s not just the people who trade the markets at the moment, but those people who use our closing prices for setting OTC trades.

The third thing is the full integration of the LME and Hong Kong. We obviously will operate here in London but there are group functions in an expansion that can work very well. We also have to look at issues like the trade repository.

So it’s really taking a clean view of things and not being tied to things in the past.

Q: Okay, you are walking right into a hot button issue for LME on warehousing. How are you addressing that?

A: It’s really a complicated issue. If you look at the value chain of trading for a metal producer. He can sell directly to an end user.  He can put the metal in a warehouse and basically do a financing trade. And with interest rates so low and contango in the marketplace, provided that he trades the forward contract, he locks in a profit for a period. The third way is, he can trade it and trade the warrants associated with the metals in the warehouse.

There have been a lot of comments in the press mainly from producers and end users who have diametrically opposed profit maximization strategies, which helps explain why some of these queues form in the warehouses. We have over 700 warehouses in our network and queues in only five of them. So the vast majority operate pretty well. The biggest problem has been in Detroit.

The point here is that, yes, the LME sets the rules for some of the ways the warehouses operate. Clearly the contract is between the warehouse owner and the client. It is not with the exchange. Yes, some of it is our problem too. But even if we came up with a solution that everyone agreed on, you still have the issues of supply and demand for the underlying commodity. You still have low interest rates. You still have physical delivery factors – size of warehouses, outward rates, the onboard rates and so on.

So we started a consultation program and have had more than 70 meetings with people. Many have submitted comments as well. But you have a polarization of comments from producers and end users. You have users saying they are paying too much for aluminum and you’ve got firms like Alcoa and other producers saying “Don’t mess with the market. If you change things you can damage the market.” And these are not always the people who trade on our exchange but use our prices for other purposes. So it’s difficult.

One of the good things to come from this is more engagement on a full range of things. I just wish some of these end users and producers would discuss it in a little more detail rather than prosecute it through the press or through the US political system and Senate. We’re also mentioned in several class action suits and from our perspective they are completely without merit and we’ll defend it to the hilt. There is no way on earth that this exchange has been caught up with anyone on anything and we feel pretty strongly about that. The levels of corporate governance with the Hong Kong Exchange are very strong. There is no short-term profit motivation here.

As for timing, the consultation period is finished. There is a board meeting at the end of this month. And after that, we’ll look at changing some of the rules. But what has come out of it is a wider range of suggestions and taking everything on board, and then us making some suggestions. So we’ll let you know in due course.

Q: We are seeing a massive restructuring of regulations for the OTC and futures industries. What does that mean for LME?

A: I believe in good regulation, not more regulation. I’m not in the camp that says that everything has to trade on an exchange. I see the validity of the OTC market. We would like to have a product suite for that market. We would like to educate the regulators about how the market trades and what the rules should be.

There are those, especially in the States, who say the LME is doing this wrong and that wrong. But they don’t even know what the LME does. So it’s an education process. The metals industry has had it crisis in the past with the tin crisis in 1985 and copper crisis in 1996. We want a safe structure.

Q: LME has traditionally been the marketplace for base metals. Today it faces challengers from CME Group, as well as domestic markets in China. What does the landscape look like to you and where do you see synergies and challenges?

A: The CME’s Comex has tried this before and I don’t see what is different. This aluminum contract may be because they see all the news around us and they want to have a go. But the majority of our users on the exchange are quite happy with things. We do have the physical network and it’s hard to replicate that. You can not, not take the CME seriously. Of course, we do. But I think it’s going to be tough for them. I think they’ve rushed this.

And for China, it really comes down to where the regulators are. We’d like to be the international arm of the Asian exchanges there. And it would be hard for them to replicate where we are in terms of international metals. So it’s less adversarial or confrontational in China and more about where we can meet in the middle.

Garry Jones Resources

  • Garry Jones on MarketsWiki (link)
  • London Metal Exchange on MarketsWiki (link)
  • “HKEx picks Garry Jones to head LME” at (link)

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