Trader takeaways: What the LME lending rule really changes (Part 2)

That is the headline. You are basically being forced to post M1 to M2 carry at level. Not if you feel like it, not when the bid shows up. You either make that carry available by 13:30 London or the LME will adjust your price like you did. No flexibility. No negotiation.

This means anyone trying to lean into front-month tightness just got their knees cut out. Holding prompt risk now comes with a built-in obligation to offer carry for free. If you were planning to ride that short squeeze into delivery, that strategy is off the table once your size crosses the threshold.

Curve structure just got more crowded and more complicated

Traders who have been working M1s and cash spreads are going to back off. Some will slide their risk out into M2 or M3. Others will keep their size under the radar or move more into OTC. And the smarter desks will just break it up across accounts.

That is the thing. The more the LME tries to fix the front, the more positions get scattered and harder to track. So this rule might keep M1 to M2 looking tidy, but that pressure is still in the system. It just gets pushed down the curve or behind the curtain.

This is why CME keeps gaining ground

They keep it simple. No warehouse games. No forced lending. No Russian-origin debates. CME aluminum is cash-settled and U.S.-based. If all you want is price exposure without the LME politics, you are going to look at CME. This new rule will only speed that up for some shops.

Will this rule work? Depends what you mean by work

It might stop the front month from blowing out. But it also punishes anyone who is early and right. It assumes every dominant position is a threat, even when it is legit.

So if you have built a good long position and you are holding M1 into tight stocks, too bad. You are now required to lend it away flat. That is not risk management. That is enforced charity.

Here is the bottom line for traders:

• If your front-month futures are bigger than the available stock, you are a dominant holder
• You are on the hook to lend that carry at level, no excuses
• If you do not, the LME will price adjust the trade and make it look like you did
• The front end loses its edge. That curve premium you used to aim for is getting capped
• More risk will flow into M2 or into quiet corners of the market where the LME is not looking
• The rule is labeled temporary but once it is in, it is in

If you are sitting on a curve book or used to working LME spreads, you are already adjusting. This rule changes how people take and manage prompt risk. The LME is trying to stay ahead of the next squeeze, but in doing that, they are making the market less transparent and less dynamic.

It is not the end of the world, but it is another reason more traders are looking to CME. The LME has always been a physical market first. But the more rules they stack on, the more it becomes a compliance trade instead of a real one.