Days before announcing a proposal to shut the iconic open-outcry trading floor at the London Metal Exchange, its chief executive Matt Chamberlain sat down with Damian Stewart, Managing Partner EMEA & Asia at Human Capital, to talk about digitisation and changing the face of a 144-year-old institution.
It probably came as little surprise to London’s metal traders when, in mid-January, the London Metal Exchange launched a discussion paper that will quite likely herald the demise of the Ring, the open-outcry pit where buyers and sellers have engaged in shouting matches to set the global price of copper and other commodities since the 1800s.
One of the few global exchanges that has yet to go fully digital, the LME was forced to shut the Ring last March because of the Covid pandemic. But despite proving its ability to seamlessly shift to electronic pricing, there are still many that will continue to raise their voices for the Ring’s return when the virus eventually passes.
In a press release announcing the consultation, Chamberlain said: “The Ring is a greatly treasured aspect of the LME’s rich 144-year history, and its closure is not a decision we or our market will take lightly. However, the LME has stood the test of time precisely because of its ability to adapt to the evolution of market dynamics and trading behaviour.
“We have been clear that we will not use the pandemic as a pretext to close the Ring, and we remain committed to this; however, it is fair to observe that this period of electronic pricing has served the market well, with consistently high volumes of activity in the pricing window, easily observable by all stakeholders, and more participants with direct access.
“Given the data, and our industry’s continued move towards digitisation and greater transparency, we believe it is now time to consider the long-term future of pricing at the LME.”
When I sat down with former investment banker Chamberlain just days before the announcement, he explained that one of the reasons the Ring has lasted so long is its unusual date system. Unlike most futures markets, where monthly contracts are bought or sold, trading for daily dates is allowed at the LME, adding a further layer of complexity.
“The perceived wisdom has been that the Ring is a better place to do that end-of-day pricing, because an electronic market works well when you have just a few liquid contracts for a few months, but an open outcry venue can be very effective to source liquidity on any bespoke date,” he tells me. “There is actually some support for that. When you look at some of the other places where open outcry trading has survived, like the Chicago and New York options pits, they are where products are a little more bespoke and the human touch is helpful.”
Just as there are plenty in the market calling for the market to go fully electronic, so there are those that are resistant to change for good reason. Hence the announcement of a consultation process that will see the LME engage with market participants until the end of March, before announcing its intentions before the end of Q2.
“Ultimately it comes down to business models,” says Chamberlain. “Some of our members and clients have models that work better with the Ring; others will do better electronically.”
He adds: “That is one of the privileges, but also one of the challenges, of running an exchange. There are so many companies whose business models are built around yours that you need to be cognisant of the impacts of the changes you are managing, not just for the LME but for the ecosystem.”
Given that context, the fact that Chamberlain built his career neither in metals nor in trading sets him apart. A Cambridge graduate who made his name as an M&A banker, first at Perella Weinberg and latterly with UBS, he was tapped by the LME to take on a head of strategy and implementation role in 2012 after guiding Hong Kong Exchanges & Clearing (HKEx) on its $1.4bn acquisition of the business. Having stood out for his work on the post-acquisition integration and build-out, he was appointed CEO at the start of 2017.
He admits that if he had realised how challenging integration could be, he might not have taken the implementation role, which he accepted, “with the benefit of total naivety”.
Now, “The big sector challenge, which we still wrestle with today, is a fascinating case study in organisational dynamics, and how one takes an institution with the history, prestige and market centrality of the LME and keeps all the best of that while simultaneously picking up the challenges of digitisation and transparency,” he says.
Those challenges have been coming in thick and fast, with the consultation about the Ring following hard on the heels of a similar process at the end of last year to address the LME’s sustainability strategy. Chamberlain says the ESG journey really began for the business five years ago around conflict minerals, and specifically the conditions under which cobalt was being mined. Cobalt is one of the LME’s smaller contracts but is increasingly in focus thanks to its role in the manufacture of electric vehicles, and issues related to child labour and conflict financing in the cobalt mines of the Democratic Republic of Congo were causing concern.
As the broader community queried the conditions in the mines, the role of the LME, not in extracting the metals but in marketing them, came into the spotlight.
“We do play a very important credentialisation role,” says Chamberlain. “We are a physically-delivered market, so if you want to deliver metal against an LME contract, it has to be on our brands list. We maintain a list of acceptable brands for delivery of metal on the LME, which tends to be used more broadly as the list of good metal across the world.”
Historically those lists were maintained purely on the basis of metallurgical quality, but the pressure was on to expand the definition of credentials to take account of ESG considerations.
“Frankly, it’s a very valid argument, because the nature of supply chains is global,” says Chamberlain. “We did a lot of soul searching informed by a lot of different views in the market, some of whom thought that we were morally complicit if we did nothing, and others who thought it was not our place.”
The end result is a two-pronged approach. On the one hand, where there are binary issues on which global consensus has been reached – such as on the use of child labour in mining, or conflict financing – then from 1 January this year the LME has rules in place that require listed brands to comply with the OECD’s due diligence guidance on responsible mineral sourcing. Those that cannot demonstrate compliance lose the LME stamp of approval.
In the more complex area of environmental impact, where there is no agreement on what an acceptable carbon footprint for aluminium is, or how much recycled content should be expected, the LME has acted to enhance disclosure rather than set parameters.
The new LMEpassport will provide metal market participants with digital credentials and enable comparability between disclosures related to sustainably produced metal.
“We are not going to step in and say you can’t sell aluminium with a carbon footprint above X,” says Chamberlain, “but we are producing a disclosure platform that will allow producers, initially on a voluntary basis, to share information about their metal, whether that relates to its carbon footprint, its impact on indigenous rights, its impact on water stewardship, or whatever.”
He adds: “By allowing that information to be disclosed we can build transparency, allow people to tailor their own parameters, and then consumers can put pressure on manufacturers to source metal that achieves certain requirements.”
No one could accuse Chamberlain of shying away from innovation; indeed, he is quick to point out that the exchanges sector was one of the first to embrace digitisation, first moving away from trading floors as early as the 1980s.
“Digitisation is broader than the Ring,” he says. “Things like LMEpassport are a great example of what we can do.” As well as collecting data about sustainability, LMEpassport solves another problem that has existed in the industry for more than 100 years, whereby a certificate of analysis confirming the chemical composition of every batch of metal produced has to be provided in hard copy. Overnight, that will now become a digital process.
Another example is the new warrant depository, going live in March. At the moment, when you deposit metal in an LME warehouse anywhere in the world you need to lodge a physical warrant at a vault to represent the title to that metal. “Even in the height of the pandemic, we had guys on motorcycles whizzing around London picking up these certificates that relate to ownership of metal in Malaysia and Taiwan, and moving them between the depository and our clients,” says Chamberlain. “That’s ridiculous in the modern world, but nobody had tackled the problem, which is actually quite an intricate legal issue when you are dealing with 14 different legal jurisdictions where the metal is actually sitting.”
Again, the pandemic accelerated a long overdue evolution to a full-view materialisation solution – the first of its kind for a multi-country jurisdiction – which will make everyone’s life easier through innovative digitisation.
Which begs a question about what role there is for blockchain in the sector as a whole, and specifically for the LME. Chamberlain is one of those people fascinated by the technology behind distributed ledger technology – “I love the maths, it’s so smart,” he tells me – and he’s convinced it has a role to play in improving commodities markets.
For an exchange, there are challenges though, he says: “Most of the things we do, people want us to do because they want to be able to come to us if things go wrong. They are happy that we are viewed as a kind of old-fashioned safe, because they want to be able to come to us when they’re looking for their metal and we can consult our records and find it.”
Chamberlain describes the LME as delivering “a central conscience” and argues a distributed ledger would be viewed as attempting to wheedle out of that responsibility.
Where there is an opportunity for blockchain, he argues, is in off-warrant storage, namely the storage of metal that is not held under LME warrant, and as such lacks the protections of the LME. An LME warrant is a value-added service, so a significant proportion of metal is still held without it, and that is where frauds take place that end up with two people arguing over the same chunk of metal in a warehouse, with each holding a document saying they own it.
“The reason people won’t put that on a central register is because there is value in other people not knowing where your metal is,” explains Chamberlain. “If your metal is on LME warrant, we publish daily stocks, everybody knows where the metal is. If not, you can keep it secret.”
He adds: “That is a great example of where a distributed ledger solution would work really well, because you can prove ownership and it’s not visible to the rest of the world. If it came to a court case, there would be an immutable record saying I sold it to you, and it is your metal.”
There have been a number of initiatives to achieve such an objective, many of which the LME has supported because it wants to see it happen, Chamberlain says: “We think if this happened there would be more metals traded and that would be good for us. But nobody has really yet got critical mass.”
Every business leader has been challenged by Covid and the LME is not alone in looking for new efficiencies that have come to light as a result of enforced changes to our working patterns.
One thing that perhaps will change, should the Ring finally be dismantled, is its male-dominated image: photos of the trading floor in action are a stark reminder of just how little diversity still exists in metals trading.
“I fully agree that we have a diversity challenge in our industry, but it’s not by any means a contributing factor to the proposed closure of the Ring” says Chamberlain. “The Ring is certainly a good visual representation of a problem that undoubtedly exists in the industry more broadly, and we have to start by absolutely recognising the scope of that challenge.”
It’s an issue he has had on his agenda since becoming CEO, where he believes that the starting point is in creating an environment in which everyone feels comfortable operating. There were some examples of poor behaviour in the marketplace, which is why he introduced a Code of Conduct two years ago. Since then, having created a culture of inclusivity, he has started to focus on diversity initiatives, including signing the Women in Finance Charter in 2020.
“Our apprenticeship programme is something I’m particularly excited about,” he says. “We haven’t, as an organisation, been particularly good at hiring apprentices in the past, but our first apprentices join this year and we have strongly encouraged applications from under-represented groups in the industry both in terms of gender but also more broadly across background and ethnicity.”
Chamberlain adds: “We have to have a more substantive set of solutions, and we are not going to solve this overnight. Hopefully over the coming years we can start to make a difference.”
This is a man with a to-do list that contains few easy wins, but he clearly combines a natural curiosity with an appetite to get stuck in. “That comes to a large extent from having been an M&A banker working across a diverse set of private companies. I have always enjoyed understanding how businesses operate, both at a macro level in how they service their clients and what their missions are, and at a micro level in how they get things done day-to-day.”
Eight years ago, he was one of the brains behind the deal that took the LME out of mutual ownership and into the hands of a foreign exchange. Demutualisation and integration were never going to be easy, but Chamberlain was central to creating a commercial model that works. He may have come into LME knowing little about exchanges and even less about metals, but he has made a formidable mark, and the future is only just beginning.