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How LME Registered Contracts Differ from Traditional Futures

 

LME futures are designed to mirror physical metal trading. They use a prompt date structure that allows traders to buy and sell futures daily for the first three months, then weekly out to six months and monthly up to ten years*.  Most volume is in the 3-month forward contract, i.e. the contract becomes prompt in 3 months.

 Find Out More About LME Futures and Forwards 

 

This structure is different to trading September Copper futures on the CME where you can buy a September futures contract on a Monday and close and settle the contract on the Friday by simply selling the contract.  In the above example if you were trading the 3-month copper you would be left with bought and sold positions with different prompt dates.  To settle the positions it is then necessary to use a carry trade.

Video content has been provided courtesy of the London Metal Exchange

Any LME position that is not settled is deliverable. Warrants are used as the means of delivering metal under LME contracts. A holder of a long contract takes delivery in the form of an LME warrant and a holder of a short position has to deliver an LME warrant to its broker. An LME warrant is a certificate from an approved LME warehouse giving title to a specific tonnage of an LME-approved metal.

Trading on the Exchange floor is also different to traditional futures markets. For each commodity the LME has two five-minute trading sessions daily, one in the morning and one in the afternoon. These are referred to as Ring trading sessions.

There is also Kerb trading at the end of each LME session when open outcry transactions occur freely outside of scheduled Ring times and when all or some of the LME metals are traded simultaneously.

Outside these times there is also 24-hour inter office trading and electronic trading using LMEselect

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Third Wednesday Electronic Contracts

In January 2015 The London Metal Exchange (LME) announced plans to enhance trading and liquidity on its electronic platform, LMEselect. It aimed to achieve an increase in liquidity by using the third Wednesday forward dates to create a standard settlement date. This would mean that traders could buy and sell on different days without have to use carry trades to match the prompt dates in order to settle.

To create this more typical futures contract the LME now  provides incentive programmes for users to contribute further volume and liquidity on LMEselect. In March 2015 it removed the “Order to Trade Policy” on the first 6 tradable outright third Wednesday months for the full sized contracts of aluminium, copper and zinc.

*Please note – Your broker may restrict how far forward you can trade a position.



How do LME Registered Contracts Differ from Traditional Futures & OTC?

LME Contracts use a prompt date rather than the traditional monthly trading date. This enable traders to trade futures for a specific day for the first 3 months to more closely reflect the underlying physical market.

LME Contracts are essentially specified forward contracts that are settled on the prompt date even if closed prior to this date.

Over-The-Counter (OTC) LME contracts may not be Registered LME Contracts and therefore have counterparty risk. Find out if your LME broker issues LME Registered contracts – contact us.

Online LME Third Wednesday contracts have been introduced to increase liquidity on LME Select and these are an exception to the regular LME Futures as they operate in the same way as traditional futures and have a standard settlement date.

Set up an LME trading account today