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LME enforces tighter floor trade rules on permanent basis

Friday, 1 Nov 2013 | 4:04 PM ET

Nov 1 (Reuters) - The London Metal Exchange said on Friday it will enforce tighter rules for "open-outcry" floor trading on a permanent basis following a trial to increase transparency amid regulatory pressure across financial markets.

The decision comes after the world's biggest base metals exchange launched a three-month test of the new rules on its copper contract in April as part of an effort to curb sharp price moves at the end of the shouted "open-outcry" sessions.

It was expanded in July to cover its six other metal contracts other than steel billet, cobalt and molybdenum.

The initiative was a response to the spotlight that regulators shined on all benchmark pricing mechanisms after the Libor rigging scandal last year that exposed interest rate manipulation by banks in London, traders have said.

The move may also help the world's oldest metals exchange fend off criticism that trading in its base metals is too opaque and vulnerable to distortions.

The LME, which was bought last year for $2.2 billion by Hong Kong Exchanges and Clearing (HKEx), has come under fire from producers, consumers and traders for its handling of a years-long crisis over its warehousing policy.

Consumers have complained that some warehouse firms registered with the LME have built up stocks and allowed queues to grow for clients seeking to withdraw material, all the time charging rent for storage.

End-users say those steps have caused long wait times that have distorted supplies and inflated physical prices.

U.S. regulators are probing the issue and end users such as MillerCoors LLC has said the British authorities need to increase their oversight of the exchange.

U.S.-based Alcoa and larger aluminium producer Rusal of Russia have called on the exchange to release more detailed data on long and short positions as well as inventories.

About a dozen trading companies and banks pay the LME for the right to send traders on to the circular floor known as the "Ring" in the LME building on Leadenhall Street in London's City financial district, where they shout bids and offers and clinch deals on their own behalf or that of clients.

While many other financial markets have scrapped such voice trading to conduct business electronically and by telephone, many metals traders say retaining open outcry as well offers the best way to discover prices that truly reflect the market.

Faith in this mechanism means businesses worldwide use some prices reached in Ring trading as the basis for their trades in physical copper, aluminum, lead, tin, zinc and nickel.

But sources have said previously some LME members and the exchange itself worry that floor traders often do not take on orders that are big enough to truly represent the market at the end of the last part of the day's open outcry business, the "kerb".

The fear is that these crucial prices, used by market participants to calculate daily profit and loss, can be based on trading of a few or even one lot - 25 tonnes in copper's case.

MINIMUM LOTS

The new rules, which set a minimum deal size during the final kerb, will come into effect on a permanent basis on Monday, the LME said in a notice to members on Friday.

That means any deal at the final kerb trading close must be for a minimum of 10 lots, with some exceptions. For tin for instance, dealers must be prepared to take five lots unless the tonnage is stated.

The change seeks to prevent the closing price of a metal being based on small tonnages, which could skew the level.

A larger minimum trading size would also help reduce the potential to deliberately push prices one way or another in the moments before the 5:00 p.m. kerb close, traders have said.

Unlike the Libor rate, which is based on bankers' opinions, the LME's metals levels are traded prices. There is no suggestion of any regulatory investigation of any LME price mechanisms.

But all exchanges are alert to increased scrutiny of benchmarks which is beginning to focus on precious metals price discovery, which uses a different method to LME mechanisms.