On Wednesday, the London Metal Exchange announced that it will be reducing the daily price limits on outright contracts for aluminium and copper from 15 percent to 12 percent beginning on July 24.
Aluminium and copper are the LME’s most liquid metals, just ahead of nickel. The Exchange experienced a wide swing in March of last year in nickel prices, which doubled over a space of a few hours.
As a result of nickel’s price swings, the LME halted trade in the metal for more than a week and cancelled contracts that totaled billions of dollars. That experience made the ad hoc solution a regular tool in the Exchange’s toolbox.
In a statement released by the LME, the organization said that an Oliver Wyman Independent Review recommended that the LME take a more granular-level approach to Daily Price Limits.
“This Notice confirms that the LME has adopted the new calibration methodology. The calibration review process for the Daily Price Limits shall occur bi-annually as well as on an ad-hoc basis where circumstances warrant additional review including, for example, the Daily Price Limits frequently being hit (which may indicate that they are calibrated too narrowly) alongside other scenarios such as a fundamental change in volatility or liquidity.”
The LME stated in the notice that the policy would be reviewed occasionally for appropriateness and revised if prevailing market conditions dictated so.