Exchange of Futures for Physical (EFP) and Exchange of Futures for
Swaps (EFS)
EFPs or EFSs may be reported to the Exchange during trading
hours and registered by LCH.Clearnet up to one hour after the
cessation of trading in the delivery month in which the EFP or
EFS is traded. These allow more effective hedging opportunities
for market participants with over-the-counter positions.
Law
The contract is governed by English law and includes provisions
regarding force majeure, trade emergency and embargoes.
Source: IPE.
Physical delivery of LME contracts
The LME contracts allow producers, fabricators, merchants and con-
sumers to insure against price risk. An important aspect of LME
futures contracts is that, with the exception of the LMEX contract,
they are not settled until the prompt date.
They are not cash-cleared in the way that other futures contracts
are and take their characteristics from those of forward contracts.
Initial margins and variation margins against risk exposure will be
called during the term of a contract, but the value of a contract is not
paid until delivery.
The LME lists eight metals and one index, the LMEX, comprising
the six primary base metals. The LME’s eight contracts are:
1. Copper grade A
2. Primary aluminium
3. Standard lead
4. Primary nickel
5. Tin
6. Special high grade zinc
7. Aluminium alloy
8. North American Special Aluminium Alloy (NASAAC).
In commodities the specified delivery date of a futures contract is
referred to as the prompt date, by which time either the position
70 Clearing and settlement of derivatives
Futures processing 71
must be closed or a delivery will take place. On the LME, the final
trading day, the last day a position can be closed, is two days
before the prompt date.
Most commodity markets are usually based on monthly prompt
dates. The LME metal futures contracts run on a daily basis for a
period of three months. The use of daily prompt dates is an impor-
tant difference between the LME and other futures exchanges. It
means the Exchange combines the convenience of settlement dates
tailored to individual needs with the security of a clearing house for
its clearing members.
After the three-month date, the daily prompts for forward trading
are reduced to weekly and then monthly contracts out to 15, 27 or
63 months forward.
The LME also offers traded options contracts based on each of these
futures contracts, together with traded average price options contracts
(TAPOs) based on the monthly average settlement price (MASP) for all
metals futures contracts.
All LME prices are quoted in US Dollars, but the LME permits con-
tracts in sterling, Japanese yen and Euros and provides official
exchange rates from US Dollars for each of them.
Trade is conducted in lots rather than tonnes, with each lot of alu-
minium, copper, lead and zinc amounting to 25 tonnes. Nickel is
traded in 6-tonne lots, tin in 5-tonne lots aluminium alloy and
NASAAC in 20-tonne lots.
The contract for each metal sets out the shapes, weights and
methods of strapping. The contract specifications are for the qual-
ity and shape, which are most widely traded and demanded by
industry.
Example Contract Specification
LME Copper Grade A Futures Contract Specification
Contract Grade A Copper
Lot Size Lot size 25 tonnes (with a tolerance of /2%)
Form Grade A cathodes conforming to BSEN
1978:1998
Weight Each parcel of copper cathodes placed on war-
rant shall not exceed 4 tonnes
Delivery Dates Daily for cash to 3 months (first
prompt date two working days from
cash). Then every Wednesday from
3 months to 6 months. Then every
third Wednesday from 7 months
out to 63 months
Quotation US dollars per tonne
Minimum Price Movement 50 US cents per tonne
Clearable Currencies US dollar; Japanese yen;
sterling; euro
Source: LME.
Delivery against LME contracts is in the form of LME warrants,
which are bearer documents of title enabling the holder to take pos-
session of a specified parcel of metal at a specified LME-approved
warehouse. Each LME warrant is for one lot of metal, the tonnage of
which is dependent on the contract specification. The front of the
LME warrant displays information about the parcel of metal, includ-
ing its brand, the exact tonnage, the shape and the location.
Warrants are issued by the warehouse companies at the request of
the owner of the metal once it is properly stored in an LME-approved
warehouse and the warehouse company has ensured conformity with
the LME’s Special Contract Rules for that metal. These rules include,
but are not limited to, the technical specification of the metal, its
shape, weight and bundling. The metal must also be of a brand that
is approved and listed by the LME.
The LME is very proud of its global role in providing a pricing mech-
anism that reflects the state of the markets it serves. For the LME, an
essential factor in achieving this aim is to maintain a spread of
approved warehouse locations that reflects the needs of the users of
the market and to monitor those approved locations for continued
compliance with the listing criteria. Such criteria include the need for
locations to be in areas of net consumption or to be ‘gateways’ serving
those areas of net consumption and also to meet the LME’s strict
legal, taxation and customs requirements. There are over 400 ware-
houses in some 32 locations covering the United States, Europe, the
Middle and the Far East.
The LME is also active in assessing potential new locations as good
delivery points. The location criteria are designed to ensure that
metal is stored in locations close to where it is needed, rather than
72 Clearing and settlement of derivatives
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