Looking at the recently announced increase in clearing house fees for LME transactions, it is difficult not to have a degree of sympathy for both sides.
For the brokers, the increase comes at very short notice at a time when growing regulatory costs are already beginning to exert a squeeze on margins.
On the other side, LCH.Clearnet is under no illusion that it will lose the LME clearing business – which has been an important generator of income – when the LME’s own clearing system is up and running.
Who can therefore blame them for trying to extract the maximum benefit from the period left to them?
It was always going to come to this at the end, particularly given the length of time since the last increase.
Is it a taste of things to come, though? Should market users resign themselves to an ongoing rise in the cost of trading?
On a more conventional futures market, the issue would mostly be one for the customer, as exchange and clearing fees are broadly passed straight through.
However, the date trading structure of the LME, together with its principal nature, makes this a much more difficult issue to standardise.
A lot of the costs, where they are incurred through date adjustments, will be difficult to pass on. In fact, the matching and rolling of positions and dates is one of the factors that has made LME business so attractive to clear.
So would the LME be able to ride to the rescue of its members, even if it wanted to? That is a very interesting question, and reluctantly I think one has to come to the conclusion that the answer is no.
Remember that a majority stake in the clearing house has been bought by the London Stock Exchange, which itself wants to play a big role in the global consolidation of exchanges.
The new owner would be likely to take a dim view of costs incurred for previous users being left uncovered after their departure.
In any case, regular readers of this column will recall that I made the point a while back, around about the time the takeover was finalised, that the world for LME members was going to change.
Those protesting at fee increases – whether directly from the LME, or, as in this case, from an associated party – should remember two important facts.
Firstly, they have just pocketed a very large amount of money in payment for their ownership of the Exchange.
Secondly, by doing that, they have accepted a fundamental change in the relationship they have with it as members. The LME’s primary function is no longer to serve the interests of its members: it is to generate a return on their investment for the shareholders of HKEx.
If that sound too brutal, I do not mean it that way. Of course, the LME will continue to take account of the requirements of members, but it is now a relationship where the sometimes-differing interests of the various parties will have to be weighed commercially.
The sale was a trade-off – cash now, in return for increased costs in the future, as the buyers need to recoup their investment at some point.
It is a perfectly open and honest approach, but because the LME up until now has been run on a (not entirely commercial) restrained profit model – to the benefit of members, who were then owners – it would be naïve in the extreme not to be expecting the cost structure to change once the guarantee period is passed.
That is all very well, you may say, but this clearing fee increase is not from the LME, it is from an outsider, and they have not been party to the ownership change.
That is true, but they stand to lose the business relatively soon, so why would they not look to take what they can?
The higher clearing fees intimate other higher costs in the future, which brokers will do everything they can to resist. From the point of view of the LME powers-that-be, I suspect there may be an unspoken thought of gratitude to LCH.Clearnet over this.
By the time LME Clear is ready to go, the increased fees we are talking about now will have become an accepted part of the costs – that is normally how these things work.
This means that the higher level of clearing fees will be one fight the LME themselves will not have to have.
They can point the finger backwards, and say it was all down to LCH.Clearnet.