The UK Court of Appeals held that the London Metal Exchange may proceed with a previously announced plan aimed at shortening the amount of time it takes to retrieve metal from exchange-approved warehouses. In doing so, the court set aside a lower court ruling on the matter.
During 2013, the LME was criticized for delivery delays from LME-approved warehouses that some claimed were artificially increasing the prices of certain LME-traded metals worldwide. (Click here for background on this matter in the article “FCA Issues Statement Regarding LME Warehouse” in the November 4 to 8 and 11, 2013 edition of Bridging the Week.)
In response, on November 7, 2013, the LME—after public consultation—proposed a rule that would link the amount of LME-traded metal an exchange-approved warehouse could accept for storage to the amount of the same metal it released whenever the warehouse could not process requests to discharge the same metal from storage in less than 50 days. (This proposal is known as the “LILO” rule, meaning the amount of metal loaded out of a warehouse is linked to the amount loaded in.)
United Company Rusal PLC, an aluminum producer, challenged the consultation process. The company claimed that the LME’s proposed rule would financially hurt producers like itself, and that the LME never adequately considered this potential harm, as it was required to do.
Rusal claimed that other alternatives, such as limiting the storage charges that warehouses could assess on stored metals beyond a certain number of days (a so-called “rent-ban option”), would also reduce the price of relevant metals (such as aluminum) without harming producers. The lower court sided with Rusal. (Click here for a summary of this legal decision in the article “UK High Court Sets Aside LME Proposed Rule Aimed to Reduce Waiting Time at Approved Warehouses to Withdraw Metals in Order to Reduce Aluminum Prices to Commercial Clients and Consumers” in the March 24 to 28 and 31, 2014 edition of Bridging the Week.)
Rusal also had argued that LME’s decision-making was biased “…since it is financed by a stock levy made by it on warehouse charges and thus had an interest in maintaining the amount of the rent charged by warehouse operators.”
In holding for the LME, the appellate court rejected Rusal’s claims and concluded that the exchange’s consultation process regarding the LILO rule was adequate. Although Rusal argued that the LME’s consideration of the rent-ban option during the exchange’s consultation was insufficient, the appellate court noted that Rusal had never advocated for this option before its lawsuit.
In response to the appellate court’s decision, LME announced it would proceed with a two-week consultation and expected to implement the LILO rule on February 1, 2015.
LME acknowledges that market conditions have changed since 2013, and that there is now a greater demand for metals, especially aluminum. However, the LME believes implementation of the LILO rule is still warranted:
[T]he LME also understands that an element of primary production continues to flow into storage—and, in the absence of regulation by the LME, it is to be expected that a significant element of such production would have continued to be loaded into [LME-approved warehouses]. …In particular, the LME believes that the behavioural change exhibited by [LME-approved warehouses] since 1 July 2013 would not have come about had those warehouses not anticipated the introduction of some form of rule-making by the LME.