By Peter Hobson
LONDON (Reuters) - The London Metal Exchange is unlikely to provide clearing services for proposed new trading platform NFEx, market sources said, presenting a significant obstacle to the new exchange before it goes live next year.
After an initial burst of enthusiasm for NFEx, fanned by objections to a sharp rise in trading fees charged by the LME, sources said subsequent cuts to the LME's charges mean members are no longer keen on the rival exchange.
"The project was hatched as a protest to the fee hike," said a London brokerage source. "This has now been addressed by the LME. People don't want a further fragmented market."
Some LME members also do not want the LME to clear for NFEx because they are worried the new venue will cannibalise their business and revenues, sources said.
NFEx aims to go live next year with contracts for base metals such as copper and aluminium that mimic those on the LME, the world's largest and oldest metals trading venue.
NFEx's Chief Operating Officer Mark Bradley said in July that the new platform was in negotiations with several leading commodity clearing houses and sources said these included Intercontinental Exchange, SGX and CME Group as well as the LME.
The LME had been seen as the favourite as it would be the most efficient option for those wanting to use both venues. A clearing house plays a crucial role as a financial intermediary between buyers and sellers.
ICE declined to comment. CME and SGX did not immediately respond to requests for comment.
Some LME members such as JPMorgan and Goldman Sachs offer their own trading platforms to clients which NFEx would compete with, sources said. JPMorgan and Goldman declined to comment.
"We wouldn't welcome NFEx," said a source at one member with its own trading platform. "Why would we have an incentive to lend our liquidity pool to someone else?"
NFEx declined to comment.
The LME said it would decide whether to work with NFEx or any other trading platform provider by the end of the year.
"We are engaging closely with our members and users to investigate the business case for such an offering, and will ultimately be guided by the views of the market," it said in a statement.
NFEx, incorporated in March with registered offices in London's financial district, has said it will operate a digital platform built by Autilla, a financial technology firm operating in commodities. Martin Abbott, a former LME chief executive, is advising NFEx.
The attraction of NFEx as a cheaper trading venue faded after the LME announced fee cuts in September to lure back volumes that had been slipping away to the OTC market and rival CME exchange.
The LME has committed not to work with NFEx, said one market source familiar with the matter. Another said the LME would not clear for the new exchange if members were opposed.
Clearing elsewhere would raise costs as traders using both the LME and NFEx would have to pay into two default funds, which offer protection against a bankrupt firm unable to honour its trading commitment.
"This doesn't simplify things for anyone," said the head of a brokerage in London. "People don't need more complexity right now, and it's not going to be materially cheaper...I don't see how it's beneficial for anyone."
NFEx's Bradley said in November the exchange had a lot of interest from industrial users and aimed to have more than 100 participants when it launched.
Before launch, Britain's Financial Conduct Authority (FCA) needs to authorise NFEx as a multilateral trading facility (MTF). FCA approval is conditional on NFEx having a capital base of 730,000 euros (£643,257.3), which sources say it has.
(Reporting by Peter Hobson; Editing by Veronica Brown and Adrian Croft)