CME Expands Metals Suite

Shanny Basar

Derek Sammann, global head of commodities and options products at CME Group, said the commodities business has had a tremendous year and the introduction of warehouses outside the US has been a breakthrough for the exchange.

The commodities unit at CME Group includes energy, agriculture and metals derivatives.

Sammann said at a media briefing that commodities have been a big driver of group results and it is the fastest growing business segment this year. “The re-introduction of downside risk has led to customers rethinking their hedging strategies,” he added.

At the beginning of this month CME Group said in a statement that total average daily volume in the third quarter of this year was 14.4 million contracts, 7% more than in the third quarter of last year. Commodity volumes outstripped growth for the total group in the third quarter – average daily volume in energy contracts rose 26% year-on-year, agricultural commodities 20%  and metals 14%.

Today CME Group announced the launch of lead futures in November, which will be the first physically settled base metals futures from the exchange and offer delivery in approved warehouses in Europe and the US. Applications for warehouse locations outside the US include Rotterdam, Antwerp and Bilbao.

Sammann said CME did not have any non-US warehouses two years ago. “The introduction of warehouses outside the US has been groundbreaking,” he continued.

In January this year CME launched physically delivered Gold Kilo Futures contracts, listed on its metals market COMEX. The contracts are physically delivered in Hong Kong to provide round-the-clock price discovery for the Asian gold market.

“We have learnt a lot about price formation in China from the Gold Kilo contract,” added Sammann. “If we were to choose to move into Asia we would use our ferrous metals contracts but our current focus is on European and US base metals.”

Young-Jin Chang, CME Group senior director of metals products, said at the briefing that the metals business follows the momentum of physical markets and so reviews the possibility of Asian delivery points for customers, especially for iron ore contracts.

The new Lead futures contract adds to CME’s base metals products which include Zinc futures and Aluminium European Premium futures. Young-Jin Chang said Zinc futures are being physically delivered for the first time this month and are operating smoothly. The first Aluminium European Premium futures contracts were traded last month.

Michael Camacho, head of global commodities at JPMorgan Chase, said in a statement: “The addition of Lead futures to CME Group’s expanding base metals portfolio will provide our industrial metals clients with capital efficiencies at a time when they are looking to mitigate risk in uncertain markets. This new risk-management tool should be a welcome development for all market participants in the base metals industry.”

The base metals contracts can be cleared and cross-margined in the same clearing house, reducing risk and collateral requirements.

Sammann said the addition of lead means that CME covers 80% of trading in base metals.

“Customers have told us to make sure these contracts work and are solid before we move on,” he continued. “CME would never follow a ‘throw spaghetti at the wall and see what sticks’ approach and we listen to our customers.”

For example, some clients had wanted CME to enter the metals market so they could clear contracts in a clearing house located in the US and governed by US regulations.

Sammann said the MiFID II standards, which were released last month and will govern trading in Europe from 2017, do not appear to contain any surprises.

“Our customers spent a lot of time thinking the US rules would be stricter than in Europe. However we are seeing more interest in CFTC regulations as Europe might actually be tougher,” he added.

Rival London Metal Exchange said in a white paper this week that European Union regulation could irreparably damage the wider industry.

Garry Jones, chief executive of the LME, said in a statement: “The LME supports EU regulators’ aims to increase transparency and reduce risk in the markets. However, requiring the metals industry to comply with regulation that is designed for other, completely different, asset classes may stifle participants’ ability to create global reference prices and manage their price risk.”

Featured image by Olaf Speier/Dollar Photo Club

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