All members, warehouse companies, London agents and other interested parties

Transcription

1 To: Ref: All members, warehouse companies, London agents and other interested parties 15/175 : A171 : W054 Date: 8 June 2015 Subject: NEW LME PRODUCTS UPDATE Summary 1. This notice provides an update on the London Metal Exchange s (LME) new products set to launch in Q4 2015: LME Aluminium Premiums, LME Steel Scrap and LME Steel Rebar. 2. Following member engagement, there is a strong market request for a simultaneous launch of the new contracts and the next release of LME Clear s core clearing platform LMEmercury, which also is scheduled to go live in the fourth quarter. This will allow members to combine testing of the new exchange and clearing functionalities in order to minimise testing effort. 3. Consequently, LME and LME Clear have decided to combine their technical go-live dates, and have now identified 23 November 2015 as the optimal joint technical go-live date. Accordingly, the new LME contracts will be launched on 23 November The launch of new contracts is subject to final regulatory approval from the Financial Conduct Authority and the Bank of England, and future rule change consultations for both LME and LME Clear. 5. Detailed contract specifications are available in the appendix to this Notice. Premium contracts 6. In response to market demand, the LME is launching a new suite of regional LME Aluminium Premium contracts. The contracts are designed to help the global aluminium community hedge their regional premium exposure, discover transparent on-exchange premium prices, and take delivery of readily available premium aluminium warrants. 7. The regional LME Aluminium Premiums will complement the global LME Aluminium contract. When traded in parallel, market participants will continue to enjoy access to the LME s liquid global market and reference prices, while also fully risk-managing their exposure to regional market dynamics. 8. As previously communicated to the market, the new contracts will cover four key regions of aluminium demand: the US Midwest, West Europe, East Asia and South-

2 East Asia. The LME Aluminium Premiums will be monthly contracts going out to 15 months and settling on the third Wednesday of each contract month. The contracts will trade in the Ring, on LMEselect and on the inter-office telephone market. In order to make premium aluminium warrant buyers neutral to differences in the Free on Truck (FOT) fee charged by warehouses to load metal on to trucks, the LME Aluminium Premiums will be settled net of FOT. Contract mechanics 9. At settlement, the buyer provides an LME aluminium warrant and cash representing the premium price as agreed at contract formation, less the premium aluminium FOT fee applying at the corresponding premium warehouse. The seller provides an LME aluminium premium warrant in the designated region. The buyer receives a premium warrant and the seller receives cash representing the agreed premium (less FOT) and a standard warrant. 10. The LME expects that, in general, a buyer will take a long position in both an underlying LME aluminium contract and a premium aluminium contract for the same date, and a seller will take a short position in both an underlying LME aluminium contract and a premium aluminium contract for the same date. Under this scenario, the buyer will pay a total cash amount consisting of the LME global price, plus the regional premium, less the FOT, and the seller will deliver an aluminium premium warrant in the designated region. 11. In this way, the premium contract provides a straightforward mechanism for buyers to source readily accessible material in a given region, and for sellers to receive fair value for selling such material. Premium Contract Rule for Warehouses 12. In order to ensure that the warrants used for delivery against the LME Aluminium Premiums represent readily accessible metal, the contracts will have more restrictive rules as to which warrants (such eligible warrants being premium warrants ) can be used in settlement. 13. In particular, only warehouses without queues in a particular delivery point will be eligible for the delivery of warrants against LME premium contracts in that delivery point. However, a core concern for the LME in respect of premium contracts was the emergence of queues at warehouses in that delivery point which previously did not have queues. 14. The Premium Contract Rule has therefore been designed to give buyers of warrants through premium contracts greater certainty that the warrants they receive in settlement will be readily accessible. 15. In summary, only warehouses that have opted-in to the Premium Contract Rule ( premium warehouses ) and have no queues can endorse new premium warrants, either through the conversion of existing standard warrants or the load-in of new metal. Should a queue form at a premium warehouse, the warehouse will not be able to endorse additional premium warrants and must load-out existing premium warrants with

3 a minimum load-out rate set at the higher rate of a) 1,000 tonnes per day or b) 3% of its total stock of premium warrants. This implies that the longest queue which could be expected to exist for the load-out of premium warrants would be 34 business days. 16. For the avoidance of doubt, the load-out requirements under the Premium Contract Rule are in addition to obligations applying to standard warrants. 17. Further details about the Premium Contracts Rule can be found in Notice 14/318 : A310 : W148, Notice 15/068 : A068 : W021, and Notice 15/070 : A069 : W023. New ferrous suite 18. The LME is launching two new ferrous contracts: LME Steel Rebar and LME Steel Scrap. These cash-settled futures are designed to complement the existing physically settled ferrous contract, LME Steel Billet, and to meet the needs of the steel community for new risk management tools. 19. The LME has a long-standing relationship with the steel and steel input industries. The new contracts were developed in response to market demand and in close consultation with steel producers and consumers. These contracts complete the value chain for long steel products: from inputs (LME Steel Scrap) through semi-finished stages (LME Steel Billet) to finished products (LME Steel Rebar). 20. Based on thorough due diligence and extensive market engagement with the physical industry the LME is delighted to have selected Platts/TSI as the index price provider for the new cash-settled ferrous contracts. 21. Final settlement, following termination of the trading for a contract month, will be based on the Monthly Average Index Price of: (a) the TSI Scrap HMS#1 and HMS#2, 80:20 Turkish Imports CFR Iskenderun Port Index for the LME Steel Scrap contract; and, (b) the Platts Rebar, Turkish exports, FOB Turkey port Index for the LME Steel Rebar contract. 22. The scrap and rebar contracts will be monthly contracts going out to 15 months and settling on the last business day of each contract month. These contracts will be available for trading on LMEselect and on the telephone market. Incentive programmes 23. As communicated to LME Members via Notice 15/023: A023 on 14 January 2015, it is the LME s intention to support new product launches via LMEselect Market Maker, New Market Participant and Liquidity Provider Programmes (together the Incentive Programmes ). Subject to regulatory approval and the rulebook consultation (please refer to Notice 15/163 : A159), the Incentive Programmes for the new Aluminium

4 Premiums and steel contracts will be introduced at the same time as the contracts launch on 23 November This Notice informs Members and other interested parties of the creation of the Incentive Programmes, their proposed duration and relevant eligibility criteria. 25. To further support the launch of the new LME Steel Scrap and LME Steel Rebar contracts, it is the LME s intention to introduce a fee holiday from the launch date of the contracts to Thursday, 31 December For the LME Aluminium Premiums, the LME will introduce a temporary fee incentive where a trade in the global LME Aluminium contract will allow market participants to trade one of the LME Aluminium Premium contracts for free (on a lot equivalent basis). LMEselect Market Maker Programmes 27. The purpose of the LMEselect Market Maker Programmes is to provide initial liquidity at launch to encourage physical users of the market to trade the new LME contracts. 28. LMEselect Market Makers may be Member firms, non-member physical users of the LME marketplace, or professional market making groups. The initial duration of the program is expected to be 12 months with the possibility of semi-annual renewal based on market conditions. 29. The LMEselect Market Maker Programmes for new contracts will include the following requirements: (a) Provide quotes for at least a minimum fraction of the specified time window (b) Provide quotes for the specified expiry months of each contract (c) Provide two-ways quotes with symmetrical minimum amounts (in lots) quoted on each side (d) Quote within a specified bid-offer spread 30. The LMEselect Market Maker Programmes for new contracts will include the following incentives: (a) A rebate of 100% of trading and clearing fees (b) Eligibility to receive a monthly stipend. Stipends are predominantly aimed at covering connectivity costs associated with trading new contracts (c) The LMEselect Market Maker Programmes for LME Steel Scrap and LME Steel Rebar will also include eligibility to participate in a dedicated Revenue Share Program (d) The LMEselect Market Maker Programmes for LME Aluminium Premiums will also include discounted trading and clearing of the global LME Aluminium contract

5 31. The LME will run an open tender via a Member Notice for LMEselect Market Makers, which will include the above requirements for quoting the new contracts. More details on the requirements and the incentives included in the LMEselect Market Maker Programmes will be published in the notice announcing the tender. Liquidity Provider Programme 32. The LME recognises there are a number of potential trading firms and individuals who will wish to act as Liquidity Providers in the new contracts, but who do not wish to meet the full obligation as an official LMEselect Market Maker. 33. For this group of users, the LME is introducing a Liquidity Provider Programme which will offer volume based discounted rates against their headline trading and clearing fees. The rebate schedule will be linked to monthly executed trade volumes. The headline fees and discounted rates will differ depending on whether the Liquidity Provider is a direct Member of the LME market or a client of an LME Member. Market engagement 34. The LME will organise meetings with all interested Category 1 and 2 members in due course to discuss the new product launches in further detail. The LME also encourages other interested parties to contact the LME Product Development team via on premiums@lme.com or ferrous@lme.com. Oscar Wehtje Head of Product Development cc: Board Directors User Committee All metals committees Physical Market Committee Warehousing Committee

6 Appendix A: LME Aluminium Premiums Contract Specifications Contract specification Description Contract names LME Aluminium US Premium LME Aluminium West-Europe Premium LME Aluminium East- Asia Premium LME Aluminium South-East Asia Premium Regions Midwest, Northeast and South US regions (as per US Census Bureau) Western Europe (as per UN Geoscheme M49 classification) Eastern Asia (as per UN Geoscheme M49 classification) South-Eastern Asia (as per UN Geoscheme M49 classification) Underlying metal High grade primary aluminium premium warrant in the designated region Lot size Prompt dates 25 tonnes Third Wednesday of each maturity month, subject to trading regulations Maturity months Monthly out to 15 months Price quotation Clearable currencies Position limits Minimum price fluctuation (tick size) per tonne Last trading day and time Settlement type Trading venues US dollars per tonne US dollar An appropriate position management regime will be implemented Tick sizes to follow the main LME aluminium contract: Venue Outright Carries Ring $0.50 $0.01 LMEselect $0.50 $0.01 Inter-office $0.01 $0.01 By (London local time) two business days before the third Wednesday of the contract month trading in the expiring contract Physically delivered Seller provides: LME aluminium premium warrant in the designated region Buyer provides: Any LME aluminium warrant, PLUS the premium cash as agreed at contract formation, LESS the premium aluminium FOT charge at the warehouse where the LME aluminium premium warrant is delivered Ring, LMEselect, inter-office telephone Trading hours Ring: 5 minutes for all regions at end of Ring 2 for Official Prices and Afternoon Kerb for Closing Prices LMEselect: 01:00 19:00 London local time Inter-office: 24 hours a day Margining Initial and contingent variation margins applied per LME Clear risk management parameters

7 Appendix B: LME Steel Scrap Contract Specifications Contract specifications Description Contract Names & Codes LME Steel Scrap SC Contract type Delivery type Lot size Contract period Price quotation Clearable currencies Minimum price fluctuation (tick size) per tonne Termination of trading Daily settlement procedure Final settlement procedure Trading venues Trading hours Margining Futures Cash settled 10 tonnes Monthly out to 15 months US dollars per tonne US dollar Venue Outright Carries Ring N/A N/A LMEselect $0.50 $0.01 Inter-office $0.01 $0.01 Last business day of the contract month until 13:30 London time LME Market Operations will calculate daily settlement values based on its published procedure Final settlement, following termination of the trading for a contract month, will be based on the Monthly Average Index Price of the TSI Scrap HMS#1 and HMS#2, 80:20 Turkish Imports CFR Iskenderun Port Index, which is available from 13:30 on the last trading day LMEselect and inter-office telephone Ring LMEselect Inter-office N/A 01:00 19:00 London time 24 hours a day Realised variation margins applied

8 Appendix C: LME Steel Rebar Contract Specifications Contract specifications Description Contract Names & Codes LME Steel Rebar SR Contract type Delivery type Lot size Contract period Price quotation Clearable currencies Minimum price fluctuation (tick size) per tonne Termination of trading Daily settlement procedure Final settlement procedure Trading venues Trading hours Margining Futures Cash settled 10 tonnes Monthly out to 15 months US dollars per tonne US dollar Venue Outright Carries Ring N/A N/A LMEselect $0.50 $0.01 Inter-office $0.01 $0.01 Last business day of the contract month until 16:30 London time LME Market Operations will calculate daily settlement values based on its published procedure Final settlement, following termination of the trading for a contract month, will be based on the Monthly Average Index Price of the Platts Rebar, Turkish exports, FOB Turkey port Index, which is available from 16:30 on the last trading day LMEselect and inter-office telephone Ring LMEselect Inter-office N/A 01:00 19:00 London time 24 hours a day Realised variation margins applied