London, 12 October 2010

My Lords, Ladies and Gentlemen – It is my pleasure to add my welcome to you all to the London Metal Exchange dinner. We are, once again, at capacity here in The Great Room and it is always a pleasure to see that our various inter‐dependent industries are at least surviving, and in some cases thriving. I would like to offer a special welcome to our chairman, Sir Brian Bender, as he navigates his way through his first LME week.

The Exchange has had another good year. Turnovers are up by approximately five per cent year on year, despite a mid‐year lull that might have been World Cup related but was more probably linked to the need for a breathing space after 18 months of uncertain and nervous post‐crisis trading. In any case I am pleased to say that business is good as we head into the final quarter. This has also been a good year for membership; I am pleased to welcome Standard Chartered and ScotiaBank Europe as Category 2 members. Meanwhile, as you know, there are other applications pending and we look forward to the addition of more clearing members in coming months.

Even in our good years there will be events that cause sadness. This year we lost three colleagues of particular note from the London community. Michael Brown, the first Chief Executive of the LME, Michael Beale, a former LME Committee member and John Dulley, a true City Gentleman, all passed away this year. This is not the time for obituaries and the details of their achievements would take a long time to recount. Many of us are fortunate and glad to have known them; each one of them might have said at this point, “Get on with it”. And so I will.

Of particular note has been the progress made by our steel contract. We merged the two regional contracts into a single, global contract during the year and we have seen an unbroken run of record trading months since January, with almost two million tonnes trading in September alone. It is a shame that the Turkish warehouses have not been able to fully function, being hampered by the complex process of obtaining a variance to VAT regulations affecting the storage of domestic steel: but it has been good to see that warehouses elsewhere, notably in northern Europe, have started to play a significant role in the steel contract.

The launch of Cobalt and Molybdenum contracts in February of this year was another notable milestone for the LME. These metals, known technically but not pejoratively as ‘minor metals’, are complimentary in terms of production and/or consumption to metals that we already trade, notably nickel and copper. Their performance is tracking well since launch and it is interesting to note that in the case of the moly contract we are learning about something new; the storage and trading of concentrates. We like to learn about new things, you never know where it might take us in the future.

What we do know about the future is that by the end of next month we will be offering, together with LCH.Clearnet, a clearing service to the London Bullion Market for use in conjunction with their gold trading. The LME has already started the collation of the London Bullion Market Association forward curve for gold; we intend to have this commercialised through our network of data vendors as soon as system testing permits and in the meantime we hope to use that curve as the basis for valuations for clearing purposes. It is no secret that both LME and LCH see an extension of the clearing service into the other OTC precious markets in London as a natural next step and I look forward to reporting material progress in coming months.

I have in the past spent some time describing the systems development work being undertaken at the Exchange. I know how much you enjoy that part of the speech but regrettably I have much less to report this year. In fact, the reason I am able to talk about changes to the steel contracts, the introduction of minor metals, and the pending launch of OTC gold clearing is because past investment in systems has given us the ability to move ahead with a commercial agenda.

So let me mention just a couple of systems before moving on. Synapse, the LCH clearing platform, is now launched and is working well. LMEsmart, which went into operation at the end of last year, is the key to our ability to offer services to the OTC markets as well as being a significant source of revenue and efficiency in its own right. LMEsword has not been without its wrinkles but thankfully there have been no showstoppers and the system is stabilised to the point at which we can look beyond fixes and talk about enhancements. My thanks go to the many staff at the LME and its technical partners, at the member companies, and at the LCH that have devoted an enormous amount of time and effort to the design, implementation, and testing of these systems.

Of course not everything that we do is based entirely on our own systems. The LME has licence agreements in India and Brazil, permitting the use of LME official prices for the settlement of locally traded contracts. We have now agreed that we will work with Singapore’s SGX to jointly brand a product; the LME/SGX Minis, which will trade on SGX platform and clear at the SGX owned and operated clearing house, AsiaClear. It has been exciting to see in the press the amount of interest this proposal has generated.

The LME is strong in Asia. We have warehouses throughout the region and we plan to add another location; we have members with offices across Asia and we have brands and brand‐testers registered in many of the region’s countries. But we cannot stand still. The growth of business in Asia is fantastic and as far as the wholesale market is concerned we are happy that the LME’s capacity to accommodate the growth is good.

But there is another sector emerging rapidly in Asia, being the retail and small professional trader segment. There is a danger that we will lose market share in that sector if we do not adapt our products to suit. Clearly we do not want to tinker with the hugely successful model that sits at the core of our business and so the offering of LME/SGX mini contracts puts us exactly where we want to be without the risk of backlash into our traditional business.

Let’s be clear also that the LME/SGX mini does not replace anything currently available to our members. The existing LME mini contract is the same in every respect as the LME/SGX mini; indeed, members that wish to market the existing product, cleared into LCH rather than Asiaclear, will have the advantage of margin offset with their existing, traditional, business together with the benefit of the LME’s extremely generous fee structure. We look forward to working with our members and with our new partners at SGX as we push further into this very dynamic region.

LME warehousing has garnered more than its fair share of headlines this year and so I think I should set the record straight on a couple of issues. First; it is not the LME’s role, nor does it have the power, to determine who owns warehousing companies. What the LME does do is work hard at making sure that the owners of warehousing companies operate them in compliance with the LME rules and the terms of the warehousing contract. Our procedures are good. It is the case that more of our warehousing companies are now owned by Member or trading companies but from our perspective that does not change very much; we have been dealing with this particular potential conflict and the issues that emanate from it for decades. We will continue to deal with it.

Second: there has been a lot of noise around warehouse load‐out rates and the fact that metal taken off‐warrant is not always available immediately. It is always interesting to see how eloquent people can become when they are describing somebody else’s business and I have enjoyed reading and listening to the wide range of views in the market. The way forward, clearly, is to remove some of the emotion from the matter and we have therefore commissioned an independent study, to be undertaken by Europe Economics, into the validity of the existing load‐out requirement. A notice will be sent to all members, warehouses and warehouse agents together with the press providing contact details for the submission of views. Those willing to be interviewed by the study’s authors will be asked to indicate that fact. But please note, this is not a survey, it is a study. Volume will not outweigh facts.

We should also note that whatever the result and recommendation of the Europe Economics study there will, it seems, always be some confusion around the role of the LME warehouse stocks. The LME stocks do not represent a stockpile of unsold metal awaiting purchase or drawdown like a consignment stock. The LME stocks have already been bought, warrant by warrant, by people who have plans for those warrants. In a last resort situation, when all other sources of supply have been exhausted, buyers will turn to the LME stock and the market will then discover at what price that marginal tonnage is available. The buyers will almost certainly not like the price that is discovered, but it will be fair. No amount of studies will change that market reality.

On a related matter I have to make some comment about the fashion for base metals ETFs. There is concern that ETFs, if they are successful, will lead to metal being diverted away from the normal supply chain and therefore acting as a distortion on the price. That is a matter for economists, and one can state philosophically that the fair price is the result of the interaction of all interested parties, whoever they might be. In any case the Exchange cannot regulate deals and stockpiles that arise outside its trading venues and away from its warehouse network.

However, what the exchange does do, and will obviously continue to do, is to regulate the behaviour of positions held within its system. To the extent that ETFs must hold warrants they will of course be subject to the lending guidance.

I could say much more. But you must be hungry, and so many of you have travelled such a long way that the anticipation of dinner with old friends and colleagues is possibly more appetising than the prospect of listening to me. It is wonderful to see such a comprehensive representation of the global industry gathered here again, and it is my pleasure to ask the members of the London Metal Exchange to rise and join me in a toast: To the Guests.

Ends --

Martin Abbott, London Metal Exchange CEO, 12 October 2010