German metals association opposes LME trading reforms

Association also fears clearing changes could stifle credit


LONDON- London Metal Exchange (LME) reform proposals came under fire from Germany's influential VDM metals association on Tuesday, with the influential body denouncing plans to abolish open-outcry trading and change how clearing margins are set.

The association said that an end to open-outcry trading will damage liquidity while the proposed change to the way clearing margins are set for LME members could restrain credit access for physical market participants.

VDM members typically trade through LME members.

The comments made on behalf of VDM's 220 members - mostly small and medium-sized traders, recyclers, producers and consumers in Germany - were in response to proposals outlined in a consultation paper issued by the LME in January.

The closure of Europe's last open-outcry trading floor was a centrepiece of the paper. Another proposal was to cut fees for electronic trading and raise fees for direct trading between members. 

"The forcing of trades on to the electronic system is questionable as trading there is heavily influenced by algorithmic and high-frequency trading," the VDM said.

In response to requests for comment, the LME said: "We very much welcome all views in respect of the proposals put forward in our discussion paper on market structure and would encourage market participants to send us their feedback over the discussion period."

The VDM's concerns over clearing margins hinge around the LME's proposal to switch to a realised variation model (RVM) from the existing contingent variation model (CVM).

Under CVM, positive balances on some client accounts are used to offset negative balances on others, essentially extending credit.

Physical market participants prefer CVM because cash flows do not have to be managed daily, only when contracts expire.

Under the RVM model, margins are held by clearing houses, which returns positive margin balances daily and call for margin in lieu of negative balances.

RVM is used for most exchange-traded and centrally cleared contracts. Financial participants, such as funds, prefer RVM because they receive daily positive balances, or cash, that can be deployed elsewhere.

However, RVM would require small and medium-sized firms to lock up more capital, the VDM said.

"The LME ... does not have to simplify its structure to attract business from investors who we think are well equipped to handle complexity," the association said.

(Reporting by Pratima Desai Editing by David Goodman) ((; +44 207 513 5681;))

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