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Business Last Updated: Jan 25, 2021 - 11:05:33 AM

Forget the Ring: London Metal Traders Focus on the Fine Print
By Jack Farchy and Mark Burton, Blomberg, 20 January 2021
Jan 25, 2021 - 11:04:46 AM

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The London Metal Exchange caught the world’s attention with a plan to close its 144-year-old open outcry trading floor. But many of the bourse’s members were focused on a more technical amendment buried 30 pages into its proposal.

They warn the plan could make it more difficult for brokers to provide credit to their customers, having far-reaching consequences for the way metals markets work. This could increase the costs of trading commodities for industrial users, which are the LME’s core community.

Availability of credit is becoming a more pressing issue for the commodities industry as several of the large European banks that have been the dominant lenders to the sector are now stepping back.

What’s concerning metal traders about the potential change is the calculation of requirements for margin -- cash that they must book to cover potential losses on their positions.

Currently, the LME uses a model called “discounted contingent variation margin,” under which profits and losses on positions are only realized when contracts expire. In the meantime, brokers can use positions from some clients to offset unprofitable ones from others.

That means they don’t have to ask their clients for margin calls, which allows them to avoid the cash flow drain of having to post daily margin. That’s particularly valuable for small- and medium-sized miners and manufacturers who use the exchange to hedge.
Credit Crunch

The LME is proposing a switch to a “realized variation margin” model, in which profits and losses on positions are exchanged daily. Several leading brokers told Bloomberg that the change, if adopted, would mean they’d have to reduce the available credit they could offer clients or charge more for it.

While some of the exchange’s industrial users are agnostic about the future of the trading floor, they’re unlikely to be as relaxed about losing access to credit facilities, said Michael Overlander, chairman of ring dealer Sucden Financial Ltd.

“When it comes to realizing there’s potential to lose their credit facilities, that’s going to make them sit up and hopefully voice their concerns,” he said.

The LME argues that the change would bring it into line with most other markets, and that it would help attract more hedge funds and other speculators, who generally prefer the margin system it has proposed.

Still, it acknowledges that there may “a reduction in liquidity available for credit line provision,” according to its discussion paper.

“The LME is aware that certain market participants, including a number of broker members, feel strongly that the risk of this is significant and that the negatives of RVM outweigh the positives,” according to the paper.


Source:Ocnus.net 2021

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