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With the London Metal Exchange’s warehouse reform programme has come an array of acronyms, covering queues, rents, loading rates, incentives and more.
And with the exchange working to address concerns its customers are not treated fairly with regards to headline warehousing charges, and the structural issues incentivising higher charges, a host of new measures is up for discussion, each with a new acronym.
So if you are confused by LILO, unclear on what a LORI is or view CC as a cloudy issue, Hotline decodes the abbreviations put up for consideration so far.
CBIG – charge-based incentive guidance* Headline warehousing charges would be overseen by the LME through monitoring and incentive reporting. Under CBIG, the LME would not directly limit rent and FOT charges, but it would likely publish maximum headline warehousing charges for reference when considering whether incentives comply with LME rules.
CC – charge capping* The proposal to introduce a limit on warehouse rents and free-on-truck (FOT) charges received “broadly positive” feedback during the LME’s consultation on warehousing last year, but there were concerns the measure could lead to regulatory over-reach
The bourse adopted a “wait-and-see” approach to CC, but it is now back up for discussion as the LME looks to tackle high rates. The measure would mean warehouses have to adhere to a schedule of maximum warehousing charges.
CTG – charge threshold guidance* Maximum charges or thresholds would be published but only function as “shadow caps”. Should a warehouse operator publish charges in excess of these guidelines, they would need to provide full economic rationale.
FOTC – free-on-truck conversion* FOTC would move an LME contract from an in-warehouse contract, whereby the buyer pays FOT, to an FOT-paid contract, where FOT is paid by the seller. This measure intends to break the trend of rising charges by ending the economic incentive for high charges, giving greater charge-bargaining power to warrant takers.
FTAs – fixed-term warehouse agreements* LME warehouse agreements would be for a fixed term rather than in perpetuity. Agreements would be reviewed either annually or biennially, at which point charges would be a focus. If the review is not passed, the LME could terminate the warehouses’ agreement.
A schedule of maximum headline warehouse charges would be required in order to ensure the LME acts in a “fair and rational way”.
IB – information barriers Part of the warehouse agreement; provisions and procedures to ensure strict information barriers between warehouse companies connected to members, or with a company entering into LME contracts.
LILO – load-in/load-out The LILO rule measures all of the metal loaded into a warehouse over a three-month period. If there is a queue longer than 50 days, the warehouse is expected to deliver out more metal. If the load-in rate at an affected warehouse is greater than a minimum load-out rate, it is required to deliver out an amount of material equal to the excess.
LILO came into effect on February 1, 2015.
LORI – load-out rate increase An increase in the minimum daily load-out rates to between 2,000 tonnes and 4,000 tonnes per day, scaled according to the amount of metal stored by a warehouse.
LORI was implemented on March 1, 2016.
QBRC – queue-based rent capping A cap on rental charges on queued metal that requires warehouses to halve published rent charges where metal has been a queue for longer than 30 days. After 50 days, the affected metal owner will be charged no rent at all.
An anti-abuse mechanism will stagger the dates the caps come into effect, reflecting load-out schedules agreed between warehouse companies and metal owners.
QBRC is “designed to protect people from queues they are not responsible for”, Matthew Chamberlain, head of business development at the LME, said on September 30, 2015.
QBRC is expected to be implemented on May 1, 2016.
* Denotes the associated proposal is under consideration as part of the LME’s April 2016 discussion paper relating to LME warehouse charges.
And some that didn’t make it…
The LME’s March 2015 consultation invited feedback on a total of eight warehouse reforms, including:
FQLC – future queue length control A performance obligation to load out metal within 50 days. FQLC received mixed feedback, with questions raised over how penalties would be assessed.
MSO – modified seller’s option Feedback was negative on the proposal to ban the use of new metal in settlements at affected warehouses. The market raised concerns over how the consequences would be assessed, and the potential negative impact on short sellers.
QBWR – queue-based warranting restriction A ban on warrant creation at affected warehouses. Predominantly negative feedback focused on the prevention of short sellers warranting metal for settlement.
See also: LME seeks views on warehouse reforms to achieve ‘fair customer treatment’ Warehouse firm Metro pushes up charges by over 30%