LME FERROUS MARKET MAKING PROGRAMMES NEW TENDER PROCESS

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1 To: All Members Ref: 17/254 Classification: General updates Trading Date: 01/08/2017 Subject: LME FERROUS MARKET MAKING PROGRAMMES NEW TENDER PROCESS Summary 1. This Notice announces the launch of a tender process for the addition of one or more market makers to the current market making programmes that were launched on 1 January 2017 (the Current MM Programmes ) for each of the LME Steel Scrap and LME Steel Rebar contracts (the Ferrous Contracts ). Background 2. The Ferrous Contracts were launched on 23 November As communicated to LME Members in Notice 15/263 : A256 issued on 20 August 2015 (the Original Market Maker Notice ), it was the Exchange s intention to enhance participation and liquidity in the Ferrous Contracts through the introduction of certain incentive programmes, which included market making programmes for the Ferrous Contracts that launched on 23 November The Current MM Programmes were announced in Notice 16/389 : A382 issued on 15 December The Current MM Programmes will expire on 31 December This Notice announces the launch of the tender process for the addition of one or more market makers for the Current MM Programmes and includes details of the relevant criteria for qualification, the commencement date, the relevant incentives, the tender and application process and certain other information. 4. Applicants are invited to set out the market making hours in their applications, which should specify the period during Asian trading hours (between 9am and 6pm Hong Kong time) during which such an Applicant will provide market making, as this has been identified as a growth area for the Ferrous Contracts. THE LONDON METAL EXCHANGE 10 Finsbury Square, London EC2A 1AJ Tel +44 (0) Registered in England no Registered office as above. LME.COM

2 5. The Ferrous Contracts have experienced a significant increase in trading volumes and open interest. Since launch, total traded volume is approximately 1,855,010 metric tonnes for LME Steel Scrap and 396,240 metric tonnes for LME Steel Rebar. The Current MM Programmes have been instrumental to the successful launch of the Ferrous Contracts, providing tradeable quotes that often surpass the criteria to which market makers had originally pledged to provide. 6. The terms of the Current MM Programmes shall remain the same as set out in Notice 16/389 : A Terms not otherwise defined in this Notice shall have the meaning ascribed to them in the Rulebook. LME s right to review the Current MM Programmes 8. The Exchange reserves the right to review and revise any of the Current MM Programmes every three months, or more frequently if required. The Exchange also reserves the right to terminate any of the Current MM Programmes or deselect any of the market makers appointed for the Current MM Programmes, with or without notice, if it deems it is in the best interests of the market to do so. Selection Criteria for the Current MM Programmes Submission of proposals 9. All interested Members or Clients, including current market makers, are eligible to submit tenders for the market maker positions in one or both of the Current MM Programmes. The current market makers will be deemed to continue in their current roles except to the extent that they may wish to apply for additional, or adjusted, obligations. 10. Interested parties are invited to submit their market making proposals to the LME Product Development team at ferrous@lme.com, no later than 18 August 2017, to be considered by the Exchange for the initial shortlist of new market makers. The interested parties applying for the Current MM Programmes should be ready to commence market making on 1 September Thereafter, interested parties may submit their market making proposals at any time until the termination of the Current MM Programmes on 31 December 2017 and the Exchange will review such proposals and appoint 2

3 additional market makers, if it deems it is in the best interests of the market to do so. 12. An interested party must provide the following parameters (the Market Making Parameters ) for each of the Current MM Programmes it wishes to be considered for: (i) the Current MM Programmes being applied for (LME Steel Scrap or LME Steel Rebar); (ii) the contract months to be quoted (from Month 1 to Month 15); (iii) the maximum bid-offer spread size; (iv) the minimum lot size for each bid and offer; (v) the hours during which it can quote on LMEselect; (vi) the percentage of those hours it will be able to provide two-way symmetrical continuous quotes at the specified maximum bid-offer spread and minimum lot size; and (vii) the interested party s proposed monthly stipend. 13. Interested parties must also submit, as part of their application, additional information related to: (i) the operational costs (such operational costs are likely to include the costs of staff responsible for market making, IT software and IT support) that are expected to be incurred in performing the market making activities in support of the stipend amount for which they are applying; (ii) the party s knowledge of the ferrous industry and their exposure to the physical ferrous market; and (iii) the party s previous trading activity in the Ferrous Contracts. 14. All proposals must be supported with evidence that the interested party has the ability (including internal technical systems, controls and infrastructure) to fulfil the Market Making Parameters set out in its submission. Where an LME Member is applying on behalf of its Client, the Member must also demonstrate that it has the ability (including internal technical systems, controls and infrastructure) to support the relevant Market Making Parameters. 3

4 15. Interested parties are invited to review the Exchange s preferred Market Making Parameters set out in Appendix 1 ( LME Market Making Parameters ) and are advised to either exceed or match these parameters to the extent possible. 16. Proposals can be submitted on behalf of a sole legal entity or on behalf of several companies provided they are all within the same corporate group (the Group ) 1. Any interested party which is not a Member of the LME must submit their proposals through an LME Member. Shortlisting selection criteria 17. The Exchange will base its selection on the following objective criteria: (i) whether the applicant can exceed the LME Market Making Parameters; (ii) where not exceeded, the difference between the commitments made in the applicant s Market Making Parameters and the LME Market Making Parameters; and (iii) the evidence provided to demonstrate the applicant s ability to meet the commitments proposed in the Market Making Parameters on a regular basis. For example, evidence of previous trading activity and market making in these contracts will be taken into consideration. Application process 18. The Exchange intends to contact the selected market makers promptly after they have been shortlisted for having met the selection criteria set out in paragraph 17 and will send the shortlisted Members (or in the case of Clients, their nominated Members) an application form to complete. The application form for the Current MM Programmes will also be made available on the LME website. 19. The Member shall complete the application form for the Current MM Programmes and provide all relevant information which the Exchange shall require in respect of the Member market maker or the relevant Client market maker, as appropriate. It is the responsibility of the Member to ensure that all information included on the application form is complete and correct. Incorrect information will affect, and possibly lengthen, the application 1 Group includes any holding company or subsidiary company of a company; any company which is a subsidiary company of any holding company of that company. The expressions holding company and subsidiary company shall have the meanings assigned to them by Section 1159 of the Companies Act

5 process and could affect payments under the relevant programme. The provision of false or misleading information may lead to disciplinary action under the Rulebook. 20. The decision of the Exchange will be made according to the selection criteria outlined in paragraph 17 above and subject to the Exchange being satisfied as to the ability of the applicant and, where appropriate, its Member, to fulfil the Market Making Parameters outlined in its proposals. 21. However, subject to the regulatory requirements applying to the Exchange, the final selection of the market makers for each of the programmes will be at the absolute discretion of the Exchange and the Exchange retains the right to select or decline any Member or Client into the programmes. 22. The Exchange will notify the market by way of Notice once the successful applicants have been selected for the Current MM Programmes. The Notice will include details of the Market Making Parameters for each selected market maker. The Notice will also be made available on the LME website. Unless instructed otherwise by the successful applicant, the names of successful applicants will be disclosed in the Notice. 23. The details of the payment process of the Current MM Programmes and of the requirements for trading on the LME are detailed in paragraphs of Notice 16/389 : A382. Rulebook 24. The Current MM Programmes shall be subject to the terms and conditions set out in the Rulebook, including without limitation Regulation 17 of Part 2 of the Rulebook. Limits, term and termination 25. The Exchange reserves the right to limit the number of participants in the Current MM Programmes or include other such limits, restrictions, conditions or clarifications as it may specify by Notice from time to time. 26. The Current MM Programmes commenced on 1 January 2017 and will terminate on 31 December Without prejudice to the above paragraph, the Exchange reserves the right to alter, restrict, suspend or terminate the Current Market Maker Programmes at any time by Notice. 5

6 No direct relationship between the Exchange and Client 28. The benefits under the Current Market Maker Programmes are made available by the Exchange to the relevant Member. It is the responsibility of the Member and the relevant Client to determine between them the basis and extent to which any benefits under these programmes may be passed on to the relevant Client. The Exchange has no responsibility to any Client for any passing on of such benefits by the Member. In the event that any Client does not receive the benefit of any rebate or stipend made available by the Exchange to a Member, this is solely a matter between the Member and the relevant Client and no party shall have any claim or right of recourse against the Exchange. Questions 29. Members or other interested parties with any questions in respect of the Current Market Maker Programmes are invited to contact the LME Product Development team by at ferrous@lme.com. Oscar Wehtje Head of Product Development cc: Board directors Steel Committee 6

7 Appendix 1 LME Market Making Parameters 2 Programme LME Steel Scrap LME Steel Rebar Minimum prompt months to be quoted Six tradable outright months Six tradable outright months Minimum market making 9am to 6pm Hong Kong time 9am to 6pm Hong Kong time hours Minimum percentage of 80% 80% market making hours during which the market maker must quote Quote type 2 ways, symmetrical volumes 2 ways, symmetrical volumes Required maximum bid-offer spread Minimum lot size on each side The required maximum bidoffer spread will be $10 during the market making hours The minimum number of Lots required to be quoted on each side will be 10 Lots (equivalent to 100 metric tonnes) The required maximum bidoffer spread will be $10 during the market making hours The minimum number of Lots required to be quoted on each side will be 10 Lots (equivalent to 100 metric tonnes) 2 Alternative combinations of the Market Making Parameters can be taken into consideration and negotiated as part of the selection criteria set out in this Notice. 7