The London Metal Exchange plans to introduce exchange-traded financially settled swaps for all non-ferrous metals contracts on Jan. 23, exchange officials said Tuesday. The average-price contracts will be the world's first of their type traded on-exchange.
The contracts have been designed for participants of the physical industry needing to hedge the monthly average price, officials said. "LME swaps will bring transparency to pre- and post-trade prices," Chris Evans, head of business development at the LME, said in a statement.
"For the first time, swaps users will benefit from a regulated market with the same counter-party default risk protection offered by regular futures contracts," he added.
According to information posted by the exchange on its web site, a swap is an agreement between two parties to "swap" a "floating unknown variable (the unknown future price) for a fixed known price over an agreed period." In the case of LME swaps the known fixed futures price is to be exchanged for the unknown variable average price.
LME swaps will be cash-settled for all LME non-ferrous metals, margined basis the exchange monthly moving average price and settled basis the LME monthly average settlement price, the exchange said. The difference between the fixed price and the monthly average settlement price will be settled in cash two business days after the last day of the averaging month, officials said.
A swap trade differs from a future on the basis of agreement "from the beginning to both buy and sell back or sell and buy back," the exchange said. To realize any cash profits or losses of a futures contract the position is "closed out" by completing the opposite leg of the transaction while in a swap the feature is built in, officials said.
The planned swaps will be tradable on LMEselect, the exchange-operated electronic platform, and the 24-hour telephone market.
Phil Burgert is managing editor of ResourceInvestor.com. He can be contacted at firstname.lastname@example.org.