By Peter Hobson
LONDON (Reuters) - The London Metal Exchange said on Wednesday it had agreed a range of waivers and discounts to assuage its members when it starts to charge a fee on off-exchange, over-the-counter (OTC) contracts that reference its prices.
A consultation with users on the fee will start on Nov. 22 and end on Jan. 12 with a view to beginning charges from April 3, the LME said in a statement.
The 140-year-old exchange announced the OTC fee in September alongside cuts for other exchange fees designed to help reverse declining volumes, down 7.7 percent last year.
The $1 (75p) per OTC contract charge aims to narrow the cost difference between trading on the LME and over the counter, where volumes grew rapidly after the exchange raised fees by 31 percent on average in 2015.
It also seeks to preserve revenue for the LME, which could see its income drop by up to 15 percent or $30 million (£22.6 million) over 12 months if fee cuts in other areas fail to boost volumes.
However, some users warn the fees could reduce trading or push business to other venues such as the CME (O:CME) or NFEx, a new platform due to launch next year.
To address those concerns the LME will narrow the scope of the fee to include roughly only half of an estimated 20 million OTC trades a year, which would earn it about $10 million a year.
"We are confident the proposals represent the right steps in bringing greater fairness to the market and compensating the LME for the services it provides to the industry," Chief Executive Matt Chamberlain said.
The fee will apply only to financial firms and won't be directly payable by physical participants or investment funds. Waivers will include spot trades in the physical market and transactions between firms that are members of the same group.
The LME will also discount to 50 U.S. cents carry trades that bridge contracts up to 60 days apart. Traders use carry trades to manage their positions.
"We are confident the key commercial concerns have already been identified and addressed by means of the wide range of discounts, waivers and offsets, which will reduce OTC booking fees on specific activities," Chamberlain said.
The largest entity to be affected by the new fee is JPMorgan (N:JPM), which market sources say accounts for around a third of the OTC market in base metals and was the loudest voice arguing against the charge. JPMorgan declined to comment.
The exemptions and discounts had defused some objections and many LME users expect to benefit more from the trading fee cuts than they lose from the OTC fee, industry sources said.
"We will do what we can to manage our overall cost base. But this is going to be written into the LME rulebook and we need to be compliant with that," a banking source said.
The rulebook allows the LME to audit members and ban them from the exchange. It can also stop providing non-members with a price feed.
"We will work closely with compliance teams of financial institutions to ensure the detailed rules and exemptions to the new fee are consistent with the nature of the market and the right disclosures are being made," Chamberlain said.