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21 October 2015

The LME, the Ring - and Arbitration



There are a couple of LME matters that are perhaps worth a look. First, there’s the slightly thorny issue of the long-term existence of the Ring. The LME have been quite clear that it is their intention to let it live as long as the demand for it is there. However, it would be disingenuous to ignore the possible effects on that of other changes that are taking place. 

Prime amongst those, of course, is the continuing slide in the numbers of ring-dealers. What 30-odd years ago was a healthy thirty plus is now down to a barely credible nine, after the departure of JP Morgan. There are for sure a variety of reasons why that number has dropped so dramatically, but the changing perception of the cost/benefit balance is probably the most important factor. Running a floor operation is expensive; that comes on top of the fact that the particularities of the LME make it a more expensive forum than the majority of commodity markets. That’s largely attributable to the non-cash-clearing system, with therefore concomitantly greater capital requirements. So starting with a market which by its nature requires substantial funding and then accepting that to use it you are going to need to almost double your front office staffing requirements (to cover office and floor) means making a big leap of faith. 

Beyond Familiarity

For the traditional, long-standing players - well, that’s what they’ve grown up with, it’s the model with which they are familiar. But when you look further, beyond that understanding bubble, and see that some of the changes underway are of themselves potentially inimical, then it becomes easier to understand why people have voted with their feet. As the market has developed the Ring has become in recent years more and more centred on being the forum for adjustments and carries. In other words, the reality is that, on the whole, Select is a better place to transact outright, bread-and-butter three months business; it’s not so straightforward, though, when it comes to matching those trades with the relevant dates. That’s what has been supporting the Ring. Monthly prompts, though, while making the LME look like the majority of other futures markets, will render that an irrelevance, since there will in those circumstances be no need of the adjustment or carry. Ah, but, say the LME, we’re not out to reduce our members business in the Ring by this move, we are going to attract a whole raft of new business which will embrace monthly trading; the two will happily co-exist, meaning greater volumes for everybody.

Pent-up Demand?

Well, that’s a nice picture, but I’m not sure that it’s true. For that to be the case, there would need to be a substantial body of potential traders sitting out there somewhere in the world, casting eager eyes at the LME, yet being frightened off by the structural peculiarities. I’ve been in this business a long time, and I haven’t come across this cohort. OK, you may say, you don’t know every nook and cranny of the business and you don’t have the deep knowledge of some geographical parts of the market that some others do. I accept that, so I could be totally wrong. What I would comment is that half a generation ago, it was probably true; there was big money from hedge funds keen to use the market, but sceptical of the way the market worked. In that half generation, though, that money has found its way into the market and that group have become comfortable with it. I’m not convinced that there is another similar pent-up demand waiting in the wings now. There may be many people who indicate that they would be interested inLME trading if it were simplified - by offering monthly prompts, for example - but that information is only worthwhile if it is accompanied by a confirmation that those same people are financially viable; and that is a much higher hurdle than just the desire. 

Changing Model

No, I suspect that monthly prompts, together with incentivisation to use them, will ultimately spell the end of the Ring; it just won’t be necessary any more. Is that good or bad? Actually, that’s a pointless question; the users have to work with what’s there.  And they will; the model may change, but the business will continue.



Arbitration

I apologise for referencing two separate issues in the same article, but following comments in the recent ‘LME Monthly Prompt’ regarding LME Arbitration I am reminded that, with the significant shift of metal trading activity from the over-regulated, high cost European arena to more business friendly countries in the Middle and Far East, the resolution of disputes has now generally moved away from the traditional LME Arbitration procedure. Even though this has been much acclaimed and successful for the best part of a hundred years, it seems that traders now tend to have their differences settled by predominantly lawyer- oriented arbitration services elsewhere, or by the courts.

Since the lawyers lack the knowledge of the custom and practice of metals trading there is now the necessity for the appointment of expert witnesses. Thus there are obvious added costs in both time and personnel and a deterrent to possibly simple dispute resolution. 

It could well be that the trade is losing out.

It is worth looking at Egmatra AG v Marco Trading Corporation, 1999  1. Lloyds Rep 862, wherein Mr Justice Tuckey found that the LME arbitrators, in refusing an expert to be put forward by one of the parties, were correct in so doing, in that they themselves had the necessary expertise.

What may be attractive to many is the fact that the LME Rules allow parties, who each nominate their own arbitrator, the option to choose that their dispute may be heard by non-lawyers. That’s surely an option worth supporting.


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