The clause of the current London Metal Exchange warehouse agreement that caused the most contention came under article 9.3, which has been renamed “Proper functioning of the market” in the new proposed warehouse deal, having previously been labelled “Liquidity”.
Warehouse companies have until February 9 to respond to the LME's proposed new warehousing agreement, with opinion split among warehouses about the strengths and weaknesses of the new agreement.
Previously, the clause in question said that the “proper functioning of the market through the liquidity and elasticity of stocks of metal under warrant should not be artificially or otherwise constrained by warehouses giving exceptional inducements”.
The new agreement excludes the word “exceptional”, but says: “Warehouses must not… give inducements, impose charges for depositing or withdrawing metals or delay the receipt or despatch of metal… where such behaviour may have, directly or indirectly, a manipulative, distortive or disorderly effect on the market”.
The current warehouse agreement did not give the LME sufficient legal cause to take action against the activity that led to the queues, some observers of the situation said.
The new wording is significant, one warehousing source said, because “the exceptional inducements and queues were part of the same vicious cycle, or merry-go-round, and the LME clearly felt impotent to act on the exceptional inducements clause as it is written in the current agreement”.
The LME’s previous management viewed inducements as an inevitable consequence, however undesirable, of low interest rates and surplus metal.
So what did the LME view as “exceptional inducements” back in 2012?
In February of that year, according to sources close to the situation, the LME’s legal counsel, Tom Hine, wrote a letter defining the criteria that the LME would use to define inducements as exceptional.
It included the following clauses:
1) Whether inducements were common practice
2) Whether inducements were in line with those paid by other warehouse companies or the same warehouse company in different locations
3) Whether they were standardised and published, or paid ad hoc (to certain customers at certain locations)
4) The basis on which inducements were calculated
5) The relative bargaining positions of the companies
“The definition of exceptional inducements was always very difficult, owing to the need to recognise in law the right of companies to make commercial agreements,” one observer said.
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