London Metal Exchange GC: Ringing the changes
9 December 2013 | By Joanne Harris
11 December 2013
10 March 2014
1 September 2014
2 October 2013
9 December 2013
London Metal Exchange GC Tom Hine has guided the institution through a Hong Kong buyout and out onto the stormier seas of Eurocracy
The trading floor of the London Metal Exchange (LME) – the last ‘open outcry’ trading floor in Europe – is a bewildering place for the uninformed. In an inner ring of red leather seats, men in suits clutching bits of paper shout numbers at each other, observed by a different group of men (and a couple of women) with iPads.
Around the outside of the ring of seats, another group leans over to keep their colleagues informed of market movements, and a still wider circle of people on the phone join in the trading with more shouts. Towards the 5pm closing time, activity hots up and it seems impossible that anyone actually knows what anyone else is doing.
Eight years ago, Tom Hine was one of the uninformed. He joined the LME as its second in-house lawyer, from Debevoise & Plimpton, bringing several years’ experience advising on M&A and private equity deals.
Hine knew little of exchanges or clearing back then but today, as the company’s general counsel and head of enforcement, he speaks fluent LME-ise. As well as explaining the workings of the trading floor, known as the Ring, he is comfortable using the exchange’s phraseology and knows its workings well.
“It’s an idiosyncratic market,” Hine observes. “One of the things you find coming here is that there’s a steep learning curve.”
The LME is a forum for trading non-ferrous metals and transacts more than 80 per cent of metals futures business worldwide. Last year trading volumes were worth $14.5trn (£8.9trn).
Founded in 1877, the prices ‘discovered’ in the Ring each day are the benchmark for metals trading globally. The inner ring of 11 representatives of LME members – banks and metals trading companies – are the only ones allowed to trade in the Ring. They are backed up by clerks, and observed by LME staff who ensure the rules of trading are adhered to and keep track of prices. The Ring trades nine metals, each in five-minute blocks, repeated through the day.
There are also electronic trading venues, open to a larger group.
During Hine’s tenure the legal team has grown and changed. From a two-person department the LME now employs six lawyers, including two on its new clearing house project, LME Clear. Compared with other exchanges and clearing houses the team size is, Hine admits, “lean”.
The amount of regulation affecting the exchange industry is considerable. Hine says the work generated as a result could well require the company to hire an additional lawyer next year.
EU regulation has the most impact. The European Markets Infrastructure Regulation (Emir) came into force last year, and governs over-the-counter derivative markets. Meanwhile, the Markets in Financial Instruments Regulation (Mifir) will cover trading on Europe’s exchanges, and is moving through the EU regulatory process.
Emir could affect the volumes traded at the LME, with strict requirements governing margin and collateral. It will also affect LME Clear, due to requirements for a segregated counterparty clearing house.
“Emir is all about keeping client assets and positions separate from members’,” Hine explains. “That affects the LME in terms of the trades we send to the clearing house and the process for that. Emir has a big impact on our new clearing house too – the application we make for regulatory approval will be under Emir as well as the UK regime.”
LME has seen its regulatory supervision transferred from the FSA to the new Financial Conduct Authority (FCA), although Hine says this has made little difference as the relevant team moved across and there has been good continuity.
The biggest recent change, and the biggest piece of work for Hine, was last year’s acquisition by Hong Kong Exchanges and Clearing (HKEx).
“There was a debate around whether the LME would ever be sold,” says Hine. The reason for this, he adds, was that it was effectively run as a utility for years, providing a service at low cost to its members, which made valuing it tricky.
However, once the potential value was identified, expressions of interest flooded in. The LME narrowed the offers down to four.
“It was interesting as a former M&A lawyer to act for the target and manage the bidders,” Hine reports. “It was draining.”
The leanness of the in-house team was matched by the leanness of the external lawyers. Hine turned to Freshfields Bruckhaus Deringer market infrastructure head Sundeep Kapila, senior associate George Swan and associate Oliver Crowley. The team of three in-housers and three private practice lawyers remained unchanged throughout the acquisition. Hine instructed additional Freshfields lawyers for smaller pieces of advice on matters such as employment and tax.
The structure ended up being cost-effective, according to Hine. From start to finish the acquisition took 15 months, completing in December last year, with HKEx paying £1.39bn – a good price.
Overall, Hine is happy with the way the process went.
“If we did it again I may have a pause between the signing and the integration process,” he says. “It’s a huge challenge integrating one business into another.”
Longer term, Hine says the combined business is looking at moving towards a “matrix” structure, which may affect the legal teams. He is working closely with his counterpart at HKEx, Christine Wong, as well as with HKEx chief regulatory officer David Graham.
The future of the LME holds many questions, such as how long the Ring will remain active.
“As long as there’s liquidity in the Ring and as long as people want to use it as a mechanism for price discovery, we’ll be around,” Hine says.
As traders shout out their prices below, his assessment seems fair.
London Metal Exchange
Position: General counsel and head of enforcement
Reports to: CEO Garry Jones
Legal capacity: Six
Christine Wong, GC and head of legal services, Hong Kong Exchanges & Clearing
LME was an important and a transformational transaction for HKEx. It represented not only our first significant foray outside Hong Kong but also our first substantial investment in a very different market operating under a very different business model. For the HKEx legal team, working on this acquisition was an exciting and enriching experience.
We started formal due diligence in December 2011 and it took us a year to complete the transaction. We helped produce the offer letters and finalise the framework agreement, completed financing documentation with two sets of lenders to fund the acquisition, and prepared the application to the FSA on the change of control of the LME. After the framework agreement was signed in June 2012, we assisted in the re-financing of the acquisition through an issue of convertible bonds in September and a private placement of HKEx shares in November 2012.
By the time completion of the acquisition took place in December, we were proud that the legal team had helped score quite a few “firsts” in the history of the group – the acquisition was our first cross-border acquisition, while the convertible bond issue and the share placement were our first capital market offers since the listing of HKEx in 2000. With our outside counsel, we accomplished a great deal and overcame substantial barriers within a short time. The learning curve was steep, but intellectually and professionally rewarding.
Looking back, completing the LME acquisition was a highlight for our team. It took us out of our comfort zone and enabled us to take on greater challenges.