LME Abandons OTC Mandate, Shifts to Fee Hikes to Navigate Competitive Pressures

The London Metal Exchange (LME), a cornerstone of global base metals trading, has reversed course on its controversial plan to mandate over-the-counter (OTC) trades onto its electronic platform, Select. Instead, the exchange will implement sweeping fee increases for OTC transactions, a move designed to balance member concerns with its need to sustain critical infrastructure investments. This strategic pivot underscores the LME’s struggle to remain competitive in a fragmented market while addressing liquidity and transparency challenges.

The Abandoned OTC Mandate

The LME’s original proposal, first floated in a 2022 white paper, aimed to centralize OTC trades between members and clients on its Select platform. The goal was to improve transparency and reduce systemic risk. However, members pushed back, citing prohibitive costs and operational hurdles. Many argued that the requirement would put LME members at a disadvantage compared to rivals like the COMEX, which do not impose such mandates.

The backlash forced the LME to retreat. “Member feedback was clear: the costs of transitioning OTC trades to Select would outweigh the benefits,” said CEO Matthew Chamberlain. Instead of mandating platform use, the LME will now double OTC fees relative to exchange-traded business. Currently, OTC fees stand at $2.36 per lot—a move that translates to an extra $0.10 per ton in copper (where one lot equals 25 tons).

Fee Hikes Take Center Stage

The fee adjustments are not limited to OTC trades. In 2025, the LME plans to raise base trading and clearing fees by an average of 4.7%, a marked slowdown from the 13% hike in 2024. The increases will range from 0% (for physical ring trading, a LME hallmark) to 6.5%, with no changes to lithium and cobalt futures—a nod to the LME’s lagging position in the fast-growing battery metals market.

The LME’s strategy hinges on incentivizing on-exchange trading while addressing liquidity imbalances. For instance, the exchange has proposed standardized lot sizes for hedging contracts: 15 lots (375 tons) for aluminum, 10 lots (250 tons) for copper, and 5 lots (30 tons) for nickel. These sizes aim to align with typical trade volumes, reducing the risk of illiquid markets.

2025 Fee Adjustments: A More Moderate Approach

The 4.7% average increase for 2025 reflects the LME’s recognition of inflationary pressures and member pushback. Chamberlain emphasized that the hikes aim to fund critical upgrades, such as new contracts for aluminum premiums and alumina pricing, which address basis risk—the gap between spot and futures prices.

The LME also expanded the definition of short-dated carry trades (where traders roll contracts to adjust delivery dates) to 60 days from 15, a move that reduces costs for physical traders. This adjustment highlights the LME’s focus on practicality over rigid rules, a theme echoed in its decision to scrap the Select mandate.

Member Feedback Drives Strategy

The LME’s retreat from its original plan and focus on fee adjustments reveal a market-driven recalibration. Members, many of whom are large banks and trading houses, had argued that the Select mandate would divert liquidity to unregulated platforms or rivals like the Shanghai Futures Exchange. The fee hikes, while unpopular, are seen as a less disruptive alternative.

“We’re walking back from a heavy-handed approach,” Chamberlain said. “The goal now is to use fees as a carrot-and-stick to keep trading on-exchange while acknowledging the realities of cost and competition.”

Strategic Implications and Market Outlook

The LME’s shift underscores broader challenges in global commodities trading. Exchanges like the CME Group (CME), which owns COMEX, have thrived by avoiding mandatory platform requirements, allowing OTC trades to remain informal. The LME’s fee hikes, while modest, may test the loyalty of members who now face higher costs without the transparency benefits of centralized OTC trading.

For investors, the LME’s moves have mixed implications. Fee increases could pressure margins for traders, potentially boosting demand for exchange-traded products (ETPs) like the iPath Bloomberg Copper Subindex ETN (JJBC). Meanwhile, the LME’s focus on battery metals—where it trails the Shanghai Exchange—suggests a long-term bet on catching up in high-growth markets.

Conclusion: A Delicate Balance

The LME’s decision to abandon its OTC mandate and prioritize fee hikes reflects a nuanced understanding of its members’ needs and competitive landscape. By avoiding a costly platform transition and opting for incremental fee increases, the exchange aims to preserve liquidity and competitiveness. The 4.7% 2025 fee hike—moderate compared to prior years—signals a commitment to sustainable growth, while new contracts for aluminum and alumina pricing show an effort to address basis risk.

However, the LME’s reliance on fee-driven incentives may not fully stem the flow of OTC trades to rivals unless it can offer unmatched transparency or cost savings. For now, investors should monitor trading volume shifts and fee impacts on ETPs like the iPath Copper ETN, while noting that the LME’s adjustments are a pragmatic response to an evolving market. As Chamberlain put it, “This is about finding the right balance—not winning every battle.”

In a sector where liquidity is king, the LME’s survival hinges on its ability to adapt without stifling its members. The jury is still out, but the exchange’s strategic pivot is a clear sign that it’s listening—and adapting.