The London Metal Exchange (LME) will permit bonded warehouse companies to extend load-out queues of cancelled warrants and encourage off-warrant stockholders to report their stock holdings to the exchange in a series of new measures that will be introduced to increase visibility of global base metal inventories.
"Taking consultation feedback into account, the LME believes that the measures… offer the optimum combination of enhancements to encourage more stocks in to LME warehouses, provide greater transparency as to global levels of inventory, and bring market-wide positive effects," the LME said today.
Queue-based rent capping
The LME's queue-based rent capping (QBRC) regulations will be loosened to allow warehouses to charge rent on queued metal for 80 days, from the current 50-day threshold, and eliminate the existing 50pc rent reduction after 30 days.
The QBRC rules disincentivise the build-up of structural warehouse queues by limiting the rent that warehouses can charge on metal units in a queue for delivery out of the warehouse.
The LME's load in/load out (LILO) rule, whereby warehouses with delivery queues of 50 days or more are required to load out more metal than they load in over a three-month period, will continue to guard against the building of structural queues under the new, looser QBRC measures.
"In respect of queues, the LME rules now guard against the structural queue model, and operational queues are not expected to become more frequent since warehouse companies would prefer to retain metal than build up an operational queue, which will cause destocking," the exchange said.
The LME will phase in the new QBRC measures over a nine-month period beginning in February 2020, and retain the option of making changes to the announced new measures if they prove too disruptive or if the incentives paid by warehouse companies to encourage deliveries into their sheds threaten to compete with market premiums.
Additionally, the LME will freeze rent and fot rates until 2027-28, "to ensure no further widening occurs between LME and non-LME storage costs", it said.
Off-warrant stock reporting
In an effort to increase transparency of global inventories the LME is encouraging off-warrant stock holders to report their holdings to the exchange, so that the market can "trade on the basis of a more holistic view of metal availability, even if core warrant stock is limited", the exchange said.
To do this, the LME will compel off-warrant stockholders to report their metal if it is stored under an agreement that requires the use of LME-bonded sheds, or one that allows the owner to warrant the metal on the LME in the future. That future warranting will induce a significantly smaller fee from the LME if the metal has previously been reported to the exchange.
"The LME believes that it has a duty to address concerns around stock transparency and has the right to compel market participants to report stock levels where the corresponding commercial agreement invokes the LME, regardless of the private relationship between the parties to the agreement," it said.
The exchange will also consider measures to further encourage reporting of off-warrant stock that does not fall under these types of storage agreement, as it looks to maximise its data collection in this area. The data will only be published when the LME "is satisfied that transparency and orderliness will be enhanced", it said.
Evergreen rent deals
The LME will also make changes to the types of practice it allows in terms of evergreen rent deals, whereby warehouses offer metal owners an interest in the rent on their warrants after they have been sold to other parties.
While this allows warehouse companies to further incentivise deliveries, it has led to the practice of traders seeking to buy warrants for the sole purpose of selling them on and retaining that rent interest. Under the new measures, only the stockholder that initially warrants the metal, and not any subsequent owners, is eligible to receive these evergreen deals.
All the new measures will come into force — or begin to, in the case of the extended QBRC rules — on 1 February 2020. But the LME will monitor the implementation of the new measures and may make changes if it feels them necessary to further optimise its warehouse system. The exchange will want at least three months of data under the new measures before considering any amendments, LME chief executive Matthew Chamberlain said.
"We will be in a position in the summer to put out our first update notice," Chamberlain said.
One additional measure that the exchange would like to introduce is to move the QBRC model to a simple percentage system, whereby warehouses with delivery queues will be required to deliver out 1.5pc of their stock each day, limiting the wait that a holder of cancelled warrants must endure to a maximum of 67 working days.
"It would be so much simpler for everybody, especially us," Chamberlain said.
If successful, Chamberlain hopes the new measures will attract investors into this market that are put off by the current lack of transparency over global stock levels.
"Success is if those guys are more keen to allocate assets to this market," he said.
