In sweeping new rules announced on Thursday November 7, the LME also said it will take action to prevent queue incentivisation and introduce a number of other recommendations put forward by stakeholders during a three-month consultation on its proposals.
"[The] LME will investigate and act to prevent warehouse companies unreasonably incentivising the formation of queues," the LME said.
Its other recommendations include the publication of new delayed warehouse stock reports and commitment of traders data, the creation of a new physical market committee and an “ongoing commitment to best-practice information barriers”, the LME said on Thursday November 7.
It will also investigate the possibility of introducing products linked to physical premiums, the LME said.
The LME proposals respond to unprecedented scrutiny and criticism of its warehouse network, particularly in the USA, where Senate investigations and lawsuits have been launched to examine claims made by physical consumers and other stakeholders that the LME, warehouses and their parent companies have inflated physical prices by withholding metal from the market in long warehouse queues that have developed in locations such as Detroit.
“As the world’s leading base metals exchange, the LME has a duty to the entire metals community to run a fair and orderly market,” LME chief executive Garry Jones said in the statement on Thursday.
“We had a responsibility to examine concerns raised about lengthy warehousing queues, as these pose a range of issues in terms of price discovery and price convergence as well as the use of the market for effective hedging,” he added.
“Having carried out a rigorous and in-depth market engagement programme involving over 70 meetings and more than 30 written responses we now call on all market participants to move forward under these new rules, which we believe best balance the needs of all LME stakeholders,” he said.
To strengthen its existing physical delivery mechanisms, the LME will also commission a full external logistical review of its warehouse system to assess “reasonable” operational expectations and requirements, as well as reviewing the warehousing agreement.
Despite the additional measures announced on Thursday, the LME still expects the proposals to be implemented as planned on April 1 2014.
Under the proposals, warehouse companies with an outbound delivery backlog of more than 50 days in an individual location will have to deliver out more than they load in, according to a scaled formula.
For example, a warehouse currently required to deliver out a daily tonnage of 3,000 tonnes would, under the proposal, need to load out at least 1,500 tonnes per day more than it loads in, the LME said.