Some companies have even told their LME sales teams they need to be prepared to move to another major European city to be able to legally service their EU27 clients after ‘Brexit’.
But other members say there are ways they can continue to deal with their clients in Europe and still remain in London, provided they have a series of regulatory and compliance factors in place.
One less draconian option being actively considered by LME members is to establish a European subsidiary and create a services contract with it. Technically, the EU-regulated subsidiary would then service the European client, but with the help of a London-based adviser, meaning no staff have to move anywhere.
Their argument is that it’s enough to have the subsidiary in place, as long as the various required compliance functions are in place. Others say this may not be acceptable to the European authorities once Brexit has taken place.
A problematic scenario would result if only EU-regulated entities were allowed to provide a full service to customers in Europe - this would force members to set up an EU entity with its own capital and the ability to issue clearing contracts. Clearing already has a whole different set of circumstances that the exchange is dealing with.
A middle ground being considered is for an introducing broker to sit in the European subsidiary to field calls and talk to clients.
All of this requires capital, regulatory permissions and having systems up and running to ensure things run smoothly after March 29, 2019.
Another route that some members are looking at relies on reverse solicitation. This means that, as long as not a member is not actively marketing to clients but instead relies on its existing clients to call and ask for a price, it would not be actively soliciting business.
How a company manages to sustain its LME business for an extended, potentially permanent, period of time when it cannot call its clients is unclear. But it’s a route that a few members say is their preferred solution, and means they’re not planning to set up a European subsidiary at all.
Currently, EU27 clients make up around 12% of total client contracts. That means for, some members, Europe is not a huge part of their business, and they would be willing to let clients go to another member rather than go through what they see as the hassle of contingency planning.
Inevitably there are probably LME members who had not really thought about it until their clients started to ask questions in recent weeks, shining a spotlight on a complex situation that is difficult to plan for given its uncertainty.
Of course, all of this may not be necessary if reports that a financial services deal is in the works and could be signed imminently prove to be correct.
The reports say the deal would be based on the rules of equivalence, which grants market access to financial firms if their home rules are equivalent or very closely aligned to those of Europe.
Effectively this means the status quo remains and clients are unaffected.
The bottom line is that how members service their European clients going forward is a company-specific determination, and there are multiple ways firms believe they can comply.
If an equivalence deal comes through as suggested, contingency plans on the sales side would then be redundant.
London Metal Exchange members are considering a multitude of ways to continue to service their EU clients in the event that a financial services deal is either not forthcoming or does not go far enough when the UK finally leaves the European Union.