The LME plans to launch this new “introducing broker membership” in the first half of next year and will help the exchange grow its precious and ferrous contracts. This model is one used by shipbrokers, Matthew Chamberlain elaborated.

“If you think of someone like Clarksons or SSY, they don’t take principle risk because they don’t own ships and they don’t own cargo,” he said. “Their model was to contact a ship owner and someone who wanted to charter the ship and they were like dating engines. They said ‘You guys have got a ship and you have got cargo; you guys get together and pay us a commission.’”

This model expanded while these shipbrokers started to get involved in commodities such as iron ore and started to arrange deals.

“So the guy who sits in the middle is not buying or selling iron ore, he is arranging deals between people who have iron ore and those that want iron ore, and that has grown in the rest of the ferrous community,” Chamberlain said.

LME ceo Matthew Chamberlain
LME ceo Matthew Chamberlain

This is different from base metals on the LME, where the members are generally dealers that are taking risks and making prices to their customers.

“In the ferrous world, most of the key intermediaries are riskless intermediaries rather than dealers,” Chamberlain added.

LME to consult on rule changes
The LME, in its strategic pathways document issued earlier in the month, said it plans to consult on the rule changes to have introducing brokers as new category of membership.

“Once they have taken this status, the IBs will be able to access the LME’s systems (and, in particular, the LMEsmart matching system) to input trades which they have brokered between LME clients (provided that those clients, and importantly their clearing members, have agreed that the IB may act in this capacity for the specific client),” the exchange said.

These trades will then be sent to the clients’ clearing members for attestation and will in this way directly flow to LME clearing members.

The LME plans to conduct a trial of this membership for new and growth products first to allow the potential impact on all of the LME’s more mature contracts to be fully assessed before the model is made available to all contracts.