London Metal Exchange is one of the major
trading centers of industrial metals in the world.
LME’s origins can be traced back to the
early 19th century. During this period, businessmen in the metal market used to
meet regularly at the Royal Exchange. Later on, little groups of commodity
traders began to do business in smaller premises, such as coffee houses.
With the Industrial Revolution, the demand
for metal surged. Before ores had to be shipped from the Americas or Asia, and
traders were exposed to high risks related to changes in prices before the
ships’ arrival. With the introduction of telegraph and steam ships became
possible to know the exact arrival date. Thus, merchants could now sell metals
using forward contracts.
The three-month contracts are typical of
LME. They were created after the opening of the Suez Canal, which reduced the
delivery time of copper from Chile to, indeed, three months.
LME has its own index, the LMEX, which is
based on the six primary metals traded. LME participants can use futures or
options, with further choices among TAPOs, LME minis, HKEX London minis, etc.
Contracts can be traded with daily expiry
dates out to 3 months, weekly expiry dates out to 6 months and monthly expiry
date out to 6, 12, 15, 27, 63 and a maximum of 123 months depending on the
metal.
Contracts which remain open until the
expiry date must be settled. This means that the metal must be delivered to one
of LME’s storehouses. Currently, less than 1% of total activities end with a
delivery. The last days before expiry date have great importance. Cash tomorrow
or TOM is the last day a contract can be closed thus avoiding settlement. TOMs
can be cleared only with dollars. Cash is the last day a contract can be
cleared in one of the official LME currencies – otherwise contract will be
settled in two days from Cash position.
LME clear is the company’s clearing house,
and it is the central counterparty for all LME clearing members. LME clear
provides financial settlement in case of one of the parties to a contract’s
default, multilateral netting of trading exposure, risk management control and
many other services.
LME disposes also of funds aimed at meeting
defaults of the members or of their clients. These funds are tested regularly
in accordance with European and International standards.
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