Coronavirus contingency plans take shape for LME warranting
The London Metal Exchange has outlined further contingency plans for metal warranting against the coronavirus (2019-nCoV) outbreak, ensuring that its Special Committee has a broad range of powers to maintain an orderly market.
The LME has put precautionary measures in place to contain the spread of the virus at its open outcry trading ring, issuing a split-team policy, the potential to transition to electronic trading and the use of its Chelmsford recovery site as a backstop should ring-trading conditions become unsafe.
Yet while the LME operates through a melange of trading venues - including the 24-hour LMEselect and inter-office telephone market - it remains a physical market, where futures contracts are physically settled against LME warrants.
LME warrants are bearer documents of title to material held in LME-registered warehouses, where holders of material can place metal ‘on-warrant’ by issuing warranting instructions to approved warehouses.
Correspondingly, the LME operates LMEsword, an electronic transfer system for LME warrants, but the physical warrants are held in a central depository.
Should market participants wish to cancel material, warrants must be collected from the depository and returned to the warehouse. In January 2019, backlogs crippled LME warrant depositories after a flurry of large cancelations took place, leading to early closures and the cessation of further cancelations.
“We and our depository provider have robust business continuity procedures in place and are working together on contingency plans regarding the coronavirus situation. There are currently many more warrants in the depository than needed for settlement, and the transfer of those existing warrants is an entirely electronic process,” an LME spokesperson told Fastmarkets by email.
“It’s of course possible that, in an extreme situation, the virus could disrupt physical movement of metal or the shipment of new warrants to the depository, and the LME always encourages short position holders to ensure they have warrants available for settlement,” the spokesperson added.
LME brokers keeping calm
Despite increased concern for the health of global supply chains across commodity markets, LME brokers see little reason to panic.
“I think managing client expectations is clearly paramount in a situation like this, but warrant inquiries have been stable in recent weeks,” an LME warrant broker told Fastmarkets.
“But it’s not just the warehouses, it’s the paperwork to and from the depositories that’s at jeopardy. I don’t imagine they’ll close [depositories] down because if they stop processing, there will be bigger problems and people might need to build inventories in the interim,” the broker added.
Fastmarkets has also learned that some large banks in Europe have similarly implemented split-team policies across trading desks, in addition to preparing offsite locations should operations need relocating.
“I’m more concerned for my own health than that of the [LME warrant] markets,” a second LME warrant broker told Fastmarkets. “But I think it’s our job to instruct clients when to execute, and I think we’re more likely to see a liquidation of warrants near term.”