The LME from A-Z
Introduction The London Metal Exchange is the world centre for the trading of industrial metals. Over 80% of all non-ferrous metal futures business is transacted on our markets. The LME brings together participants from the physical industry, the financial community and its own members to create a vital, robust and regulated market where there is always a buyer or seller, where there is always a price and where there is always the opportunity to transfer or take on risk 24 hours a day. This guide provides an explanation of terminology used in both the physical and futures markets for producers and consumers of metal. 1
A A abandon: actuals: American-style option: approved warehouse: arbitrage: To allow an option to expire without exercising it. Trades that result in the delivery of the commodity, i.e., not hedging, speculation or arbitrage. This term is used more in the United States. On the LME, the term physical trade is more commonly used. An option which may be declared on any day prior to expiration, with the underlying being transferred as a spot transaction for cash. Any warehouse approved by the LME, for the delivery, storage and collection of LME-branded metals traded on the Exchange. The purchase/sale of a contract on a market and the simultaneous taking of an equal and opposite position, usually on another market, to profit from discrepancies in the price and/or currencies involved. ask: assay: assignment: at-the-money: audit trail: The quoted market selling price. See also offer with which this term is interchangeable. An independent qualitative and quantitative evaluation of the chemical elements contained in metals. LME contract specifications define the required purity and minimum assay that registered brands must meet. Notification from LME Clear to the options writer that their position has been exercised. The state of an option where the strike price is the same as or nearest to that of the current market price of the underlying metal. The record of trading information identifying the brokers participating, the firms clearing, the terms and time of the trade and, when applicable, the customers involved. Asian-style option: An option exercised at the average underlying price over the period of its life (LME Traded Average Price Options contracts are called TAPOs). 2 3
B B backwardation: base metal: basis price: bear: Market situation when a nearby price is higher than a further forward price. Non-ferrous metal, excluding precious metals. The reference price used for establishing a physical contract. In option trading it is the price agreed for the underlying should an option be declared, more commonly referred to as the strike price or exercise price. One who anticipates a decline in prices. borrowing: broker: One form of carry. In this case the simultaneous buying of metal for a near-dated prompt and the selling of that metal for a later-dated prompt. In effect, the party is borrowing the metal for the period. In the context of the LME, a person or company that buys from or sells to customers. On the LME brokers act as principals to the contracts with customers carrying imbalances of trades in a house book, which they may offset with other brokers. bear market: A market in which prices are declining. bull: One who anticipates a rise in prices. bear spread: bid: Black-Scholes model: The simultaneous purchase and sale of two contracts of the same metal with the intention of profiting from a decline in prices whilst also limiting a potential loss, e.g., selling a nearby delivery and buying a deferred delivery. The quoted market buying price. An option pricing model, named after its two US designers. Most LME traders use a version of this, adapted for LME contracts. bull market: business day: A market in which prices are rising. Any day except Saturday or Sunday, any public or bank holiday in England, a day during which trade on the Exchange has been suspended by or under the authority of any enactment or a day which the directors declare not to be a business day. 4 5
C C C & F: call option: carry: cash price: cash today: cathode: Cost and freight, whereby the quoted price for physical material includes all costs incurred in shipping the metal to the customer s location but not including insurance. A contract that gives the holder the right, but not the obligation, to buy metal futures at a set price (the strike price) on a given date. The simultaneous purchase and sale of the same tonnage of the same metal for delivery on different dates. See borrowing and lending. The current price in the market for cash/ spot contracts. LME cash contracts are for delivery two days forward from the trading day. An LME trade that is carried out after the normal period for a cash trade (i.e., for delivery two business days later). The negative pole in electrolysis. Cathodes deliverable on the LME are flat rectangular shapes that have been refined by electrolysis. ceiling: CIF: clearing: clearing house: client contract: A recognised high point in market prices. This may be a point the market does not expect the price to exceed, the highest price achieved before the market declines or a level set by a customer as a maximum price to be paid. Cost, insurance and freight, whereby the quoted price for physical material includes all costs incurred in shipping the metal to the customer s location including insurance. The process of registering and guaranteeing the financial settlement of futures and options transactions and the settling of differences between clearing members. An independent body appointed by an exchange to carry out the clearing processes between members. In the case of the LME, this is LME Clear. A contract between a broker member and its customer. 6 7
C C client cross: close (out): closing prices: combination: commission: commission house: A purchase and sale by a clearing member to themselves which is recorded in the member s House account at LME Clear. A client cross is for a clearing member to register a client contract in the LME matching system for regulatory purposes. To undertake an opposite position, i.e., if the initial transaction was a purchase, the closing out activity is to sell the same tonnage for the same prompt date. LME Closing Prices are determined for margining purposes at the close of business on each business day by the LME Quotations Committee. See also Evening Evaluations. A mixture of contracts used to produce a hedging strategy, it may include both futures and options. Fee charged by a broker for executing an order. A term (mostly used in the United States) for brokerage firms that gain the majority of their revenue from fees charged for trading activities. consumer s hedge: contango: contract specification: corner: cross trade: custom smelter: The purchase of futures or call options, or both, as protection against a rise in raw material prices. Market situation when a nearby price is lower than a further forward price. The detailed requirements as per the LME Rules and Regulations necessary for metal to be approved for delivery against LME contracts. When one operator owns or controls an excessive amount of stocks enabling them to control the supply of material and in consequence to control the price. In LME terms, a trade between a broker and its customer, which is not revealed to the rest of the market but for registration purposes it is entered in the matching process by the clearing member as a buy and sell contract to and from itself. A smelter that processes concentrates for customers rather than a feed from its own mining operation. For this service, treatment charges or tolling charges are received. 8 9
More than 80% of global non-ferrous futures business is transacted on LME platforms 10 11
D D daily price limit: day order: declaration date: The maximum price, increase/decrease, permitted from the previous day s settlement price. There are no such limits on the LME. A day order must be executed within the same trading day as the order is placed or it shall be cancelled. The last date on which the holder of an option may advise the grantor of his intention to exercise the option. difference account: DPRS: A customer statement showing matching purchases and sales adjusted by commission and exchange fees and showing the ultimate amount due to or from the broker. Daily position reporting system through which member firms report all outstanding market positions to the LME so that the market may be properly regulated and Lending Guidance enforced. deliverable grade: delivery point: delta: derivative: Grades of metal, which have been officially approved by the LME as deliverable in settlement of LME contracts. An approved location at which metal may be stored in order to fulfil delivery of LME contracts. The rate of change to the premium of an option as the underlying price changes. The collective term for a future, or a call or a put option. The price of which is derived from the value of the underlying metal. Over 550 brands of metal are listed as deliverable against the LME contracts 12 13
E E efficient market: A market in which information is immediately available to all users. exchange rate: The price of one currency in relation to another. EFP: European-style options: Evening Evaluations: exchange contract: Exchange for physicals. The exchange between two customers of both physical and futures positions (also known as against actuals ). An option that can only be exercised on its expiry date. The prices determined for margining purposes as at the close of business on each business day by the LME Quotations Committee and confirmed by LME Clear. These are sometimes referred to as LME Closing Prices. A contract made between two clearing members, which has been matched and registered with the clearing house. exercise: exercise price (strike): exotic options: expiry date: The process by which an option holder initiates the right to buy or sell the relevant futures contract. The value of the underlying futures contract determined at the time of purchasing an option. Hence the price achieved if the option is exercised. A variety of options with non-standard pay out structures usually traded over-the-counter (OTC) and designed specifically for a user. The date after which an option can no longer be exercised. Exchange Open Interest: Exchange Open Interest (EOI) is a calculation produced by LME Clear to represent open exchange positions of LME clearing members for a particular prompt date. 14 15
F FAS/FOQ: fabricator: fair value: floor: FOB/FOT: Free alongside/free on quay, whereby the quoted price for physical material includes all costs incurred in getting the metal to the point of loading onto the means of transport. A company that processes refined (cathodes, ingots, billet etc) or semifabricated (extrusions, sheet metal etc) metal to produce products for sale to end consumers. The theoretical price at which a contract/warrant should trade. A recognised low point in market prices. This may be a point the market does not expect the price to fall below, the lowest price achieved before the market rises or a level set by a customer as a minimum selling price. Free on board/free on truck, whereby the quoted price for physical material includes all costs incurred in getting the metal to and loaded onto the means of transport. forward month: FCA: fundamental analysis: futures contract: futures curve: The designated month in which a futures contract expires. The Financial Conduct Authority. The study of the underlying physical factors that affect the supply and demand of metal. F An agreement to buy or sell a fixed amount of metal for delivery on a fixed future date at a price agreed today. The series of prices that someone would be willing to transact today, for future delivery periods. It is the current snapshot of the sum of all market participants expectation of prices in the future for a commodity. The futures curve is also referred to as a forward curve. 50 delta: The state of an option where the strike price is the same as, or nearest to, that of the current market price of the underlying futures contract. 16 17
177 million lots were traded on the LME last year 18 19
G H gamma: The rate of change of the option delta for each increase in the price of the underlying. haircut: A percentage reduction in the stated value of collateral put up for margining purposes with LME Clear. give-up: Where one broker enters into a contract with a customer which is then given up by that broker to another broker nominated by that customer. Usually done to reduce margin exposure or to reduce warrant delivery obligations. See also transfer. hedge: hedger: holder: Futures or options transactions entered into with the motivation to reduce risk. Person undertaking a hedge. The buyer of an option, more commonly referred to as the taker. grantor: The seller of an option contract, who in turn receives a non-refundable option premium from the taker. house account: An account designated for the broker s own transactions. GTC: Good till cancelled. An order to buy or sell at a specified price, which is valid at any time during market hours until executed or the order is cancelled. See also open order. 5.3 million tonnes of metal went in and out of LME warehouses in the past 12 months 20 21
I K initial deposit/margin: integrated producer: Funds put up as security for the guarantee of the contract fulfilment at the beginning of a futures or options contract. A producer who also owns the smelting and semi-fabricating facilities. kerb: A trading session when open outcry transactions occur freely outside of scheduled Ring times and when all or some of the LME metals are traded simultaneously. interest yield: in-the-money: intrinsic value: In the context of the LME, interest yield refers to the profit earned by borrowing metal in a contango market, sometimes giving the user a greater return than is available from the current interest rate on money. A term used to describe an option contract that is showing a profit. An element of an options premium. It is the amount by which an option is in-the-money. LME non-ferrous metals trade over 40 times the actual world production 22 23
L L lending: lifting a leg: One form of carry. In this case the simultaneous selling of metal for a near-dated prompt and the buying of that metal for a later-dated prompt. In effect the party is lending the metal for the period. The closing of one side of a balanced position, thus exposing oneself to price movement. liquid market: London agent: LME Clear: A market where selling/buying can be achieved readily. An organisation appointed by each listed warehouse company to act on its behalf and create, update or cancel warrants in LMEsword. The LME s clearing house. limit order: limit up/down: 24 An order in which a customer stipulates the maximum/minimum price acceptable. The maximum price increase/decrease from the previous closing price. There are no set limits on LME contracts, but under LME rules, limits can be imposed under certain circumstances. The LME has over 650 listed storage facilities across 37 locations in 15 countries LMEselect: LMEsmart: LMEstage: LMEsword: long: lot: The LME s electronic trading platform. System through which member firms process and confirm trades conducted on the Exchange. The LME s system that allows trading strategies to be tested against algorithms in a simulated live market. The LME s secure electronic transfer system for LME warrants, facilitating the transfer of ownership and stock reporting. An open position for the purchase of metal. A specified quantity of a single contractual unit (e.g., LME Copper 1 lot = 25 per tonne). 25
M M MASP: Monthly Average Settlement Price. The average of the daily official settlement prices for the month. matching: The process by which trades are input by two brokers who have made a trade with each other in order to confirm the trade. margin: margin call: mark to market: market maker: The amount of money/collateral called by LME Clear for the purpose of insuring against loss on an open position. A request by LME Clear to make an additional margin payment, because of adverse price movement on the position. Sometimes called variation margin. The daily value of a contract by calculating the gain or loss in cash flows over the term of the contract with relation to the current market value of the position. In LME terms, a broker who is willing, but not obliged, to quote both buying and selling prices to other members or clients. matching period: maturity: merchant: MinMax: A specified period of time, by which trades must be matched. The date when a futures contract that has not been offset by an opposite position must be settled by delivery of physical metal. A dealer in physical metal who sources stocks and markets for customers but neither produces nor consumes metal for his own use. The use of both put and call options, one as a grantor the other as a buyer, in order to obtain a flexible hedge within an upper and lower price range and at the same time to eliminate or reduce the adverse costs of premiums. market order: An order to buy or sell without regard to a specific price. The member company will execute a market order at the best price available immediately after receiving the order. MIT: Market-if-touched. An order that becomes a market order if a specified price is achieved. A sell MIT order is placed above the current market price, a buy MIT order is placed below the current market price. 26 27
There are more than 580 LME-approved brands of metal from 55 countries around the world 28 29
N O naked: An options position in which the grantor does not own the underlying metal. offer: The quoted selling price for metal. See also ask. nearby: The nearest delivery date or month to cash. The LME offers three trading platforms: the Ring, our open outcry trading floor; LMEselect, our electronic order book; and the 24-hour inter-office telephone market official prices: offset: offset hedge: open order: open outcry: The last bid and offer prices quoted in the second Ring of the morning session, commonly used by industry as a reference price for the day. Closing of an open position. A sale offsets a long position. A purchase offsets a short position. A trade designed to nullify price risk arisen from a physical position. An order placed into the market which will remain in the market until it is traded or the member company cancels the trade. Also known as good till cancelled. A method of trading employed on the LME, whereby brokers sitting in the Ring, make bids and offers for a metal, stating the number of lots of metal, the price and delivery date required. 30 31
O P option: order routing: OTC: out-of-the-money: A contract that gives the buyer of the contract the right but not the obligation to buy or sell a futures contract at a set price. The buyer pays a premium for this right. Process whereby LME members can connect their clients directly to the LMEselect trading system via third party applications and through which LME member firms receive and execute client trading requests. Over-the-counter: A derivative transaction that is not standardised nor transacted on an exchange. A term used to describe an option contract that is showing a loss. physical: position: position limit: pre-market: Trades that result in the delivery of the commodity, i.e., not hedging, speculation or arbitrage. The net tonnage a party has bought or sold on any given prompt date. Also the overall position, being the net tonnage bought or sold for all prompt dates combined. The maximum overall position a broker allows a customer. The limit may vary according to whether the customer is long or short and depending on the type of business in which they are involved. The morning trading between brokers which is carried out inter-office prior to the first LME Ring session. premium: A one-off payment, made at the outset, to purchase an option. The premium is a write-off unless the option is traded on either at a profit or when some or all of the premium may be recovered. 32 33
P R principal-to-principal: producer s hedge: prompt: prompt date: put option: A contract where each party is acting as principal on its own account. LME client contracts are between brokers and customers, where each is responsible for its own obligations. LME exchange contracts are between clearing members of the Exchange. These are novated overnight so that LME Clear has a principal-to-principal contract with each clearing member. The sale of futures or purchase of put options, or both, as protection against a fall in metal prices. Due for immediate delivery. The delivery date of a futures contract. On the LME the prompt date for a cash trade is two business days forward, so the last date an open position can be closed is two business days before prompt. See tom/next. A contract that gives the holder the right, but not the obligation, to sell metal futures at a set price (the strike price) on a given date. refinery: resistance level: RIE: Ring: Ring dealer: roll: round turn: A processing plant usually associated with a smelter that produces high purity metal. A level at which a price trend is halted either temporarily or totally. See also floor and ceiling. A Recognised Investment Exchange under the terms of the Financial Services Act 1986 and its successor the Financial Services and Markets Act 2000. The circle of seats on the LME floor which brokers occupy when trading. More commonly the term is used to describe the periods of trading which are broken down in to five-minute sessions for each metal. LME category 1 member firms that have the exclusive right to deal on the market floor. A carry transaction, whereby an open position is closed out and replaced with a similar position for a prompt date further ahead. The complete transaction of a closed out futures contract, i.e., both the buying and selling operations. Commission rates are sometimes quoted on a round turn basis. 34 35
4 billion tonnes of metal are traded on the LME each year 36 37
S S secondary metal: semi-fabricator: semis: Scrap metal that has been recycled. A company that processes refined material into shapes or forms for use by a fabricator. Semi-fabricated products. stockist: stop-loss order: A distributor of semi-fabricated products who holds stock for sale to consumers. An order to close a position should the market rise above or below a stated level in order to minimise loss. settlement price: LME Official Settlement Price is the official cash sellers price (offer) announced each day by the LME. strike price: The value of the underlying futures contract determined at the time of purchasing an option. short: smelter: spot: spread: squeeze: An open position for the sale of metal. A processor of mine feed or scrap material (secondary smelter) which produces crude metal. The first deliverable prompt date and the price quoted for it. On the LME, the term cash is more commonly used. A term referring to the difference in two prices. The contango or backwardation between two prompt dates or the difference between the bid and offer price. Excess demand over supply on a particular prompt date or period that causes the price(s) for that date (period) to rise more sharply than surrounding prices. swap: switch: synthetic: The exchange of an open futures contract for some other form of collateral. It could be swapped for another futures contract, for an option contract or for physical material. (Swaps-style contracts trade on the LME under the name Monthly Average Futures.) The exchange of one warrant for another, in order to change the location, brand or shape or the exchange of one futures contract into another, usually to change the prompt date. A strategy of buying a combination of futures and put options to achieve the equivalent position of buying a call option or buying a combination of futures and call options to achieve the equivalent position of buying a put option. 38 39
T T T/Cs: technical analysis: A treatment charge made by galvanisers and refiners for their services. The study of charts of historical price movements to establish a pattern in order to predict price movements and establish trigger points when either a sale or purchase should be made. touched: traded option: The phrase at market if touched refers to an order to execute a buy/sell trade should the market reach a stated price level. An option contract that can be bought and sold freely up to the declaration date. theta: tick: The measure of change to the value of an option with the passing of time. The minimum change in price from one quote to the next for a futures contract. transfer: The movement of a customer s contract from one broker s account to another, usually done to reduce margin exposure or to net down warrant delivery obligations. See also give-up. toll smelting: tom: tom/next: See custom smelter. An abbreviation of tomorrow, which in LME terms means the next business day. Within the LME normal two-day settlement, a position may nevertheless have a prompt date one day forward. It can still be officially traded up to the first Ring of that day under a procedure known as tom/next (tomorrow/next day), which allows a position to be rolled forward to the official cash date on the payment of a fee. Also known as T/N. See cash today. $14.9 trillion worth of metal was traded on the LME last year 40 41
V W value: value date: variation margin: An LME term indicating a price that has been traded but is no longer being quoted by either buyers or sellers. The prompt date of a futures contract, most commonly used when referring to the underlying futures contract for an option. Additional funds required to maintain the cover provided by the initial margin when there has been an adverse price movement on the market. See also initial margin. warrant: writer: A document of possession, issued by the warehouse company, for each lot of LME-approved metal held within an LME-approved facility. Warrants are used as the means of delivering metal under LME contracts. The seller of an option contract. See also grantor. vega: The measure of change to the value of an option in relation to a change in the volatility. volatility: The measure of price change for a particular metal over a period of time. Volatility is measured historically in order to assess future or implied volatility. 42 43
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Nothing in this document constitutes an offer or a solicitation of an offer to buy or sell any security or other financial instrument or constitutes any investment advice or recommendation of any security or other financial instrument. To the best of the LME s knowledge and belief, statements made are correct at the time of going to press. LME contracts may only be offered or sold to United States foreign futures and options customers by firms registered with the Commodity Futures Trading Commission (CFTC), or firms who are permitted to solicit and accept money from US futures and options customers for trading on the LME pursuant to CFTC rule 30.10. All such statements and all opinions expressed herein are published for the general information of readers but are not to be taken as recommendations of any course of action. The LME accepts no liability for the accuracy of any statement or representation. The London Metal Exchange. No portion of this publication may be reproduced without written consent. The London Metal Exchange logo is a registered trademark of The London Metal Exchange. THE LONDON METAL EXCHANGE 56 Leadenhall Street, London EC3A 2DX Tel +44 (0)20 7264 5555 Fax +44 (0)20 7680 0505 A member of HKEx Group. V5.0/0415