November 12, 2019 / 7:29 PM / 23 days ago

London Metal Exchange proposes six-month delay to telephone trading compliance

LONDON (Reuters) - The London Metal Exchange (LME) said on Tuesday it would take an extra six months to make its telephone trades compliant with transparency requirements set by European regulators.

FILE PHOTO: Traders work on the floor of the London Metal Exchange, in London, Britain September 27, 2018. REUTERS/Simon Dawson

The deadline for compliance with the European Securities and Markets Authority’s (ESMA) rules is Jan. 1, 2020.

Most of the trades on the LME, world’s oldest and largest metals exchange and owned by Hong Kong Exchanges and Clearing Ltd (0388.HK), adhere to transparency rules under the Markets in Financial Instruments Directive II (MIFID) and waivers apply to most that do not.

Trades under scrutiny from ESMA are those transacted on the LME telephone market, as bids and offers - information known as “pre-trade” - are not published until deals are executed.

On Tuesday, the LME said members preferred the “systematic fixed price auction” (FPA) approach where bids and offers are published and there is a 30-second delay before trades are actioned.

Due to the technical changes required for this option, it would mean a six-month delay to the mid-2020s but there could be a “manual” version installed in January if regulators do not agree to giving the LME time.

The LME said the FPA would have the least impact on the market and that it did not expect high volumes of activity.

The other proposal, the customer order and market quoting approach, would still comply with MIFID but would also require members to publish adjustments to fees and introduce more steps to the trade.

Members also feared this approach would hit revenue as customers went to the over-the-counter market to avoid higher fees, the LME said.

“Members have expressed concerns to the LME about the level of material change to processes and technology required to implement customer order and market quoting approaches,” the exchange said in the consultation paper.

The LME also said the amount of trades that need to comply to pre-trade transparency could be “considerably higher” than a previous estimate of about 5% of total traded volumes.

That is worth about $785 billion, according to a Reuters calculation based on LME trades last year.

This is because hedging exemptions are not applied consistently across market participants and there are expectations for behavioral changes around use of the market if the less preferred option was implemented, the exchange said.

Reporting by Zandi Shabalala; editing by David Evans

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