(Bloomberg) — The London Metal Exchange set a new rule on Friday to force traders to reduce large positions, after the market was rocked in recent months by the arrival of some of the world’s largest energy traders.
The exchange said that, starting Monday, any trader with a position in the nearby month’s contract larger than the total available stock would be forced to reduce its position by offering to lend it to other traders.
The move comes after several occasions in which energy traders — which have made an aggressive push into metals in the past year — have built large positions in the LME’s contracts. Most notably, Mercuria Energy Group Ltd. recently built a position in aluminum that at one point was larger than 1 million tons, Bloomberg has reported. That’s several times the size of exchange inventories, which have dwindled to less than 350,000 tons.
Bloomberg reported earlier this month that the LME had intervened to compel Mercuria to lend its position in the main aluminum contract for June.
In Friday’s statement, the exchange said the LME had in recent months “directed market participants to take a number of actions to reduce large on-exchange positions relative to prevailing stock levels.”
The LME, acting through its special committee, “now feels it appropriate to introduce a temporary market-wide front month lending rule, delivering a transparent and generally applicable set of requirements for managing large positions held up to and including the next monthly prompt date,” according to the statement.
Any trader with a position in the nearby monthly contract for a metal larger than total inventories of that metal (not including inventories already owned by the trader) will be forced to offer to lend the position at “level” — that is, to roll its position into the next month at the same price.
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