Futures processing 73
areas of production, thus assisting traders and industry in meeting
their last resort delivery requirements as readily as possible.
In common with many financial futures only a relatively small per-
centage of LME contracts actually result in delivery, as the vast major-
ity of contracts prove to be hedging contracts bought or sold back
before falling due for settlement. As a result, the deliveries that do take
place, either in or out of warehouse, will reflect the physical market
demand and supply, and the information included in the LME’s daily
stock reports can play a major part in the market’s assessment of the
worlds metals prices.
The SWORD system
Each lot of metal, for which a warrant is issued, is held in an LME-
approved warehouse. The warrant gives right of possession to the
specific lot of metal against which it was issued. The warehouse com-
panies, acting through their agents in London, issue warrants. The
LME has many different warehouse locations and the delivery of war-
rants is at the seller’s option.
In January 1999 the LME and the launched a joint initiative called
SWORD that became fully operational later that year.
The SWORD is a secure electronic transfer system for LME war-
rants which can now be held in a central depository. All LME war-
rants are produced in a standard format with a barcode. Warehouse
companies that are issuing these warrants ensure that the details are
known to SWORD which acts as a central database, holding details of
ownership and is subject to stringent security controls. The transfer
of the ownership of LME warrants between SWORD members is a
matter of seconds and all rent payments are automatically calculated.
The SWORD brings a number of benefits, particularly in adminis-
trative efficiency by removing the physical transfer of warrants and
the manual operations that involved. It also reduces the number of
times a warrant has to be passed by hand, as warrants no longer
need to be physically transferred from owner to owner every time the
metal is bought or sold.
Soft commodities
We can compare the various requirements associated with delivery
between a soft commodity like cocoa and those of the preceding
energy and metals contracts by looking at the Euronext.liffe Cocoa
Futures Contract Specification.