London Metal Exchange Presentation

The London Metal ExchangeBY LAUREN NUGENT & GLENN TAYLOR PROFESSOR PORTER MBA 660: INTERNATIONAL EXPERIENCE, LONDON

Overview:

Introduction History Metals Market Corporate Structure Financials Logistics Membership Operations Futures and Options Current Issues/Topics Importance of LME to US Questions

Introducing the LME:

Introduction: Industry: Commodities Exchange

Located at 5 Leadenhall Street, London Privately held by its members 2011 Stats: 146.6 million lots (contracts/or transactions) $15.4 trillion/year $61 billion/business day International in a true sense 95% of business comes from abroad Handles 80% of global metals futures

History: Founded in 1877 However: Dates back 400 years during the reign of Queen Elizabeth I Start of 19th Century:Trading was growing substantially Tin was needed for Britains industrial revolution Would take 3 months or more to be delivered by ship from Asia Traders needed protection Place an order today, what if price triples in 3 months on day of delivery?

LME was created to hedge against risk!

Grew as global marketplace became more

industrialized!

Metals Market: Non-ferrous=non-iron

Aluminum Copper Tin Nickel Zinc Lead Aluminum Alloy Cobalet Molybdenum

Minor Metals

Steel billet

LME Corporate Structure: Wholly owned subsidiary of a new company - LME

Holdings Limited. The governance structures of the LME provide for a number of Exchange sub-committees, the majority of which report to the Board of The London Metal Exchange Limited (the Board) either directly or through the Executive Committee (EXCOM). EXCOM is itself a sub-committee that reports to the Board.

LME Corporate Structure Ctd.-

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EXCOM consists of: Chief Executive - Martin Abbott Deputy Chief Executive - Diarmuid O'Hegarty, Responsible for all aspects of LME regulation General Counsel and Head of Enforcement - Tom Hine, Responsible for all legal matters relating to the Exchange. Managing Director, LME Asia - Liz Milan, Responsible for all commercial aspects of the Exchange's presence in Asia Director of Finance and Company Secretary - Philip Needham Responsible for LME accounting and financial matters and company secretarial matters, Managing Director - Post Trade Services - Trevor Spanner Chief Technology Officer - Michael Warren Responsible for ensuring the smooth running of all LME IT and technology operations. Director, Systems Operations - Andrew Williams Responsible for: ensuring availability and upgrades of all mission-critical IT systems,

LME Committee Structure Operational Committees: Aluminium, Cobalt, Copper, Lead and Zinc,

Molybdenum, Nickel, Tin, Index, Plastics, Steel, Warehousing, Trading, Ring Dealers #, Traded Options (All report to EXCOM) Corporate Governance: Audit and Risk, Remuneration, Nomination, Trustee Committee In respect of The London Metal Exchange Ltd Pension Scheme Committees Created By LME Rules: Arbitration Panel, Enforcement, Special, Quotations Regulation & Enforcement: Disciplinary Panel, Appeal Panel, Ring Disciplinary Charity Committee not part of a specific branch

LME Financials:-

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In the 2010 year, the profit before taxation for The London Metal Exchange Limited (LME) was 12.5m and after accounting for taxation was 9.4m. This included revenues of 50,763,000 for the year, as well as expenses of 38,619,000. The Group made charitable donations during the period totaling 74,500, much of it for their Scholarship Programme, with some of the money going towards other Dividends proposed in respect of 2010 are 4.5m, being 0.35 per share The net of the assets of the group in 2010 were 49,678,000 and 19,141,000 for the company.

Logistics: Trading takes place across 3 platforms: Open-outcry trading in The RingTraders sit around circle Small amount (12) of members allowed to participate Monitored by LME staff

Inter-office telephone marketCan see the price on the screen Contact broker and then complete deal

LMEselectElectronic trading platform Customizable settings to individual needs

7 Categories of Membership: Category 1: Ring Dealing

Entitled to trade in the Ring, LMEselect, and the telephone market All the privileges of ring dealing members except they may not trade in ring

Category 2: Associate Broker Clearing

Category 3: Associate Trade Clearing

May not issue client contracts nor may they trade in the ringMay issue LME contracts but are not members of the clearing house

Category 4: Associate Broker

Category 5: Associate Trade

No trading rights except as clientsReserved for Individual & Honorary Members

Categories 6 & 7:

Operations: Forum for the trading of futures contractions and

options Publishes daily reference prices

Used all around the world for industrial and financial participants for reference, hedging, negotiations, etc.

Futures & Options:

Current Issues: High Costs Cutting Margins? Things to consider: Margins being cut into recentlyPast year-profits fell 19% Even though-22% increase in trading volumes from 2010 Increasing costs? Failed investments? Operating expenses 76% of revenue too high to handle?

No dividends due to uncertainty about future ownership

Current Issues: LME for Sale? London Metal Exchange up for sale? Who knows? Currently, Intercontinental Exchange Inc, Hong Kong Exchanges & Clearing Ltd. are final bidders

CME Group Inc. just recently eliminated

Shareholders need a compelling reason. At the right price, anything is for sale! Sale will need approval: From 75% of shareholders & 50% of LME members

Importance of LME to US: According to the LME website, the U.S. Steel

industry has shown clear demand for hedging and price management tools like the LME steel billet contract As with Europe and Asia, the LME are continuously assessing potential new delivery locations in the US, from 29 July, New Orleans will become the first US location for good delivery against the steel billet contract.

Questions to Think About and Ask: On the topic of 3 platforms: What percentage of all transactions happens throughout each platform? Has new technology created a change in volume throughout each platform? Whats the profit margin on each one of the platforms?

On LME business:

How much business comes from emerging markets? How much growth is in emerging markets compared to industrialized markets? Biggest risks of the exchange? Any failed settlements? Concentration risk? Top ten players make up what percentage of the volume? Any regulatory issues? Profits falling as volume increasing What are associated costs causing this? Any unforeseen costs?Is the LME for sale, or not for sale?

On the sale of the LME:

Are there alternatives to selling the LME? Can the form of ownership change allowing the members to monetize their ownership? Why not go public; acquire other businesses? What goes into the bidding process?