Financial industry groups raise concern on LME's OTC trade plans, sources say

LME members voice opposition via industry groups

*

LME members raise issue with UK financial watchdog

*

LME to consult on full details of the measures

By Pratima Desai

LONDON, Feb 5 (Reuters) - Two financial industry groups have raised concerns with the London Metal Exchange (LME) about its plans to require private deals between members and clients to be carried out on its own platform, five sources with knowledge of the matter said.

The LME wants its members to transact so-called over-the-counter (OTC) trades of up to 10 lots, equivalent to 250 metric tons of copper for example, on its Select trading system. It also wants them to hedge such trades on Select.

This contrasts with COMEX, which is part of U.S.-based CME Group and offers copper, aluminium and other metal contracts. COMEX does not require its members to carry out OTC trades on its systems.

The Futures Industry Association (FIA) and the Association for Financial Markets in Europe (AFME) sent a joint letter to the LME laying out members' concerns in December.

This unusual step followed a meeting with LME members, who would normally raise objections and concerns via working groups.

LME brokers typically complain about revenue raising moves such as trading and clearing fee hikes and costs of other requirements such as reporting OTC trades.

"We recognise the LME's ongoing efforts to enhance transparency and market structure and are engaging constructively with them on relevant proposals," AFME and FIA said in response to a request for comment.

Three of the sources said LME members had also raised the issue with Britain's Financial Conduct Authority (FCA). The watchdog declined to comment on this or whether it had been consulted about the LME's plans.

The LME said its aim is to increase transparency and liquidity and it welcomed feedback "from all LME stakeholders" on a market structure modernisation plan announced in September.

"We are confident that the planned measures will lead to better outcomes for the market as a whole," the LME said in response to a request for comment

"We expect the changes will require some of our members to adapt their business models ... full details of the measures will be put forward and formally consulted on in the first half of 2025," the 148-year old exchange added.

Initially the LME published a white paper on its proposals. At that time it had planned only to consult on changes to its Rulebook needed to implement the proposals.

Industry sources say members want the LME to drop its plans requiring its members to transact OTC orders for its most liquid three-month and monthly contracts of up to 10 lots on Select from the second half of 2025.

LME members also want to know how the 10 lot number was determined. They are worried it will not stop there and that the exchange will keep raising the limit to draw in more OTC trades.

A proposal that OTC contracts amounting to less than 10 lots using LME prices must be hedged on its own electronic system has led some to suggest that the LME is trying to ban brokers and banks from netting their buy and sell orders internally and stop them from hedging on other exchanges, such as COMEX. (Reporting by Pratima Desai; Editing by Veronica Brown and Alexander Smith)

Cme Group