INTERVIEW: LME sees new trading platforms as complementary – ceo

New trading platforms could serve a complementary function rather than a competitive role to the London Metal Exchange, ceo Matt Chamberlain said in an interview.

The exchange will be open to partner with over-the counter (OTC) platforms and new start-ups in the dealer-to-client space, he added.

“I don’t actually feel there is a desire to simply come and replicate the LME because it wouldn’t be great for the market; the market doesn’t want to see a fragmentation of liquidity and, frankly, it wouldn’t be a particular viable business model for any start-up platform because I know how much we have to spend on compliance and physical services and it wouldn’t be viable as a start-up proposition.”

“We are always happy to talk to people who want to do exciting things in our markets, it is part of our role and part of our responsibility of being the central market place to almost allow that innovation to flourish,” he said.

However, he added that LME members were tied up with changes in the regulatory environment and might not be ready for a new OTC platform going live in early 2018.

“I would be surprised if any of our clients and members were ready to go. The whole industry is totally underwater on MiFID II, I just can’t get any of our members to focus on technology delivery right now because they are so busy doing MiFID II.”

“Certainly if we partnered I am not sure we would be ready to go live in Q1 2018. We would have to do it properly – we would have to speak to our members, our customers, check their support, do all the work, do all the technology; that’s not a quick lift.”

He added that start-ups or fintech companies are looking for niches, one of them being able to tap into the dealer-to-client space seen in the OTC market.

There are various new platforms that are being launched or under construction, including new metals trading platform Non-Ferrous Exchange Markets (NFEx). NFEx is expected to launch in early 2018 and was founded by a number of ex-LME executives with an aim to provide a cost-efficient centrally-cleared venue to capture some of the OTC base-metals business that has migrated away from exchanges. 

One big reason why OTC platforms would look into partnering with the LME is related to market structure and OTC markets tending to look at daily-date structures and clearing, Chamberlain said.

“The other exchange models are future exchanges – CME and Shanghai Futures Exchange are futures exchanges and that means that the futures model doesn’t have the same parallel OTC world, and the advantage of futures exchange is pretty much the entire futures business comes to you.”

“At the LME we are not really a futures market, we are a margins forward market. We have always been closer to our OTC world, so there is much more fungibility, more transferability between LME trading and parallel OTC trading. So that means people starting OTC platforms are always more likely to come to us then go to a futures exchange because we support that OTC market in a way that futures exchanges really don’t, its just a quirk of market structure.”

The LME, on the one hand, has reduced fees on short-dated carries after a consultation with its members and users and has plans to introduce a new financial OTC fee.

The “all-in fee” (the cost of a member trade together with the associated client contract) paid to the LME for an exchange traded contract is $2.70 per contract, while the all-in-fee paid for an OTC contract to LME is $0.90 per contract.

The LME has indicated an OTC contract booking fee of $1 in its strategic pathways document earlier this month, which means that the all-in-fees could go up to $1.90 per contract.

However, the exchange is still consulting with its members on what the exact OTC booking fees will be and has not committed to an amount yet, Chamberlain added.

The LME will not be asking people involved in platforms about their clients and other documentation but they will ask how many LME contract-equivalent OTC trades have been done to work out the fees that they would need to pay, Chamberlain said, adding that details will come from dealers and then the financial institutions’ compliance divisions.

“Any venue that wanted to list contracts settled to our prices would need to have an agreement, just like MCX and others have,” Chamberlain said.

Additionally, many venues would like to trade and then clear with LMEclear, and the exchange is happy to have those conversations with interested parties, he added.