Traders will react on the trading floor of the open pit at the London Metal Exchange in 2019.
Photographer: Jason Alden / Bloomberg
Photographer: Jason Alden / Bloomberg
The London Meat Trade captured the world’s attention with a plan to closed its 144-year-old open-air trading floor. But many course members focused on more technical change that buried 30 pages into his proposal.
They warn that the plan could make it harder for brokers to give credit to their customers, with far-reaching implications for the way metals markets work. This could increase the costs of trading goods for business consumers, who are a key LME community.
Access to credit is becoming an increasingly important issue for the commodity industry as a number of major European banks that have been major lenders to the region are now retreating.
What metal traders are worried about is the potential change in measuring requirements for margin – money they need to hold to avoid potential losses. the situation.
Currently, the LME uses a model known as the “discounted incidental volatility margin,” where profits and losses on positions are only realized when contracts expire. In the meantime, brokers can use positions from some clients to counter unprofitable ones from others.
That means they don’t have to request margin calls from their clients, which allows them to avoid the cash flow from posting margin daily. This is especially valuable for small and medium-sized miners and manufacturers who use the exchange for a hedge.
Credit crunch
The LME proposes a shift to a “margin of change achieved” model, in which profits and losses on positions are exchanged on a daily basis. A number of major brokers told Bloomberg that the change, if adopted, would mean they would have to reduce the available credit they could offer clients or pay more for it. a shon.
While some business users of the exchange are agnostic about the future of the trading floor, they are unlikely to be as optimistic about losing access to credit facilities, said Michael Overlander, chairman of ring retailer Sucden Financial Ltd.
“When it comes to realizing that there is a potential to lose their credit resources, that makes them sit up and hope to voice their concerns,” he said.
Read more: European banks are falling out of love with commodity traders
The LME argues that the change would bring it into line with most other markets, and would help attract more hedge funds and other speculators, who would prefer the marginal system. it is recommended.
However, it acknowledges that “a reduction in liquidity may be available for line of credit provision,” according to the discussion paper.
“The LME recognizes that some market participants, including several broker members, feeling strongly that the risk here is great and that the negative ones of RVM outweigh the positives, ”according to the paper.