The London Metal Exchange will introduce market-making programmes to enhance the liquidity of its new products and existing contracts, it said on Thursday August 20.
“The programmes will provide market makers for the LME’s forthcoming aluminium premium contract and two new ferrous contracts – steel scrap and steel rebar – set for launch on 23 November 2015,” the exchange said.
“The LME is also today announcing a similar market-making programme, coming into effect on 1 October 2015, to boost existing third-Wednesday contract liquidity on LMEselect as part of its Liquidity Roadmap initiative,” it said.
One of the main concerns about the forthcoming aluminium premium contracts is that there will not be enough liquidity for them to work, as they will require swap providers that are willing to exchange available metal for metal tied up in delivery queues.
It is the first time in the LME’s 138-year existence that programmes of this kind have been introduced.
The programmes will launch on October 1 for copper, aluminium and zinc. There are up to a maximum of five market-making slots available for each metal in three outright dates and carries – the outright third Wednesday, the third-Wednesday-to-third-Wednesday carry and the third-Wednesday-to/from-three-months carry – and they will apply only to trading on the LMEselect platform.
Market makers “will be eligible to receive a full rebate of all trading and clearing fees charged by the exchange for the contracts resulting from the market maker’s market-making activities, together with a monthly stipend for each programme for which a market maker acts as market maker to aid technology and personnel costs,” the LME said.
“To support the launch of the LME’s new products, the exchange also plans to introduce a fee holiday from the date of the new contracts’ launch until the end of this year,” it added. “As of January 2016, the new contracts will trade on a competitively priced fee schedule.”
While some have said that the LME’s aluminium premium contracts are more a way for the exchange to show that it is actively looking into the problem of disproportionately high aluminium premiums rather than creating a sustainable new product, these programmes support the view that the LME is serious about making them work.
“This is a big step for the LME as we aim to enhance participation on the exchange and further develop our range of products for global metals traders,” Matthew Chamberlain, the LME’s head of business development, said in a statement. “These market-making programmes will give our initiatives the best possible start, ensuring they meet the market’s trading and hedging needs from the outset.”
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To view all of Metal Bulletin’s articles on aluminium premiums, click here.
Jethro Wookey
jwookey@metalbulletin.com
Twitter: @jethrowookey_mb