It’s taken the new chief executive of the London Metal Exchange Matthew Chamberlain four years to understand the complexity of the 140-year-old bourse. Now he’s on a mission to simplify it.
Days after his appointment was announced by the LME’s parent Hong Kong Exchanges and Clearing the 35-year-old former investment banker has outlined his vision to attract more customers and protect London’s place as the centre of global metals trading.
“If we can give a market structure that’s easier to trade, it’s easier to bring people back [to the exchange],” he tells the Financial Times at the LME’s headquarters in the City of London.
On Monday, Mr Chamberlain released a 57-page discussion paper that he hopes will give him the “mandate” to tilt the LME towards a structure more familiar to mainstream financial investors and hedge funds.
For two years, a robust debate has animated LME members and customers over how the exchange can compete and expand its business, while preserving its storied links to physical commodity markets.
Mr Chamberlain believes the LME can be both a natural home for its traditional physical metals users, such as aluminium can makers and also for financial investors who want flexible exposure to commodities and metals that rival exchanges provide.
The LME is the world’s leading metals exchange, setting the global reference price for metals such as aluminium, copper and zinc. But since it was bought by HKEx for £1.4bn in 2012 trading volumes have fallen as banks and funds exited commodities and competition intensified. Volumes were down 7 per cent last year following a 4.3 per cent decline in 2015.
Part of the problem is the complexity of the LME, which stands apart from other big exchanges. When a user currently places a buy order, by phone or computer, they get a contract for delivery of metal three months to the date of the trade.
“This is one of the most complex market structures anywhere in the world,” says Mr Chamberlain, adding that he does not want to be being distracted by broader initiatives such as expanding in China, which will now be left to the parent HKEx.
Although he expects a “huge number” of LME members and investors to disagree with his views, he won’t shy away from making difficult choices.
“I do prioritise a consensual approach. It’s not to say we’re not going to make the tough decisions, but I want to make sure that the market feels like we’re moving with them and we’ve listened to them.’’
The use of individual daily delivery dates on the LME was designed for physical metal users, who may want to hedge the date of a shipment or sale of metal. That’s more difficult for financial players, who need to buy and sell quickly, and ensure their investors that they are receiving the most liquid price.
As interest in commodities picks up after a savage bear market, the LME wants to attract more investors to the exchange and its contracts.
“I’m absolutely not expecting the market at the end of this [discussion period) is going to say ‘fantastic we’re all in agreement’ but I hope they would if they’re being honest accept we have the mandate to make the change,” says Mr Chamberlain.
In the past, Mr Chamberlain says, the LME wasn’t always clear about the changes it wanted to make. “They [the market] genuinely didn’t know where we were trying to get to,” he says.
During his work on reforming the LME’s warehouse system, he has gained an in-depth knowledge of the exchange. Members say this marks him out from some previous chiefs who had to learn on the job.
Mr Chamberlain was appointed interim CEO in January after Garry Jones, a former executive at NYSE Liffe, suddenly resigned. Mr Jones pushed through fee increases that were unpopular with many members and tried to attract more electronic traders to the exchange, a move that further alienated brokers.
The discussion paper released on Monday outlines a plan to allow users the option of concentrating trading on a contract that matures on the third Wednesday of every month. That model is more familiar to most financial investors.
“We are trying to break this mechanistic linkage between cash and three-month price,” says Mr Chamberlain.
This year the LME will launch a gold futures contract with a consortium including Goldman Sachs and the World Gold Council, which could be a model for broader change at the exchange. It aims to link London’s physical gold market with a standardised futures exchange model, something that could be mimicked in its main metals contracts.