The exchange is extending the weight range for palladium that is eligible for delivery against the Palladium futures contract.
Starting with the July 2019 contract month, metal will be eligible for delivery if it is in units of one or more pieces (referred to below as bars) between 90 troy ounces and 192.904 troy ounces, which equates to 6 kilograms.
This change will mean larger bars are eligible for delivery on the exchange.
The delivery process for the larger bars will differ from the process for standard size bars. For standard size bars – i.e. between 90 and 110 troy ounces – there will be no change to the delivery process. Standard size bars held in exchange-approved depositories can be put on warrant with the exchange, and the warrant is transferred at the point of delivery.
For larger bars, i.e. those above 110 troy ounces, there will be an additional stage in the process. Larger bars held in exchange approved depositories can be put on warrant with the exchange in the same way. In order to ensure that the amount delivered is consistent with the Palladium futures contract size of 100 troy ounces, ownership to a portion of the larger bar – within the existing tolerance band of 10% – will be transferred.
The warrant for the larger bar can be assigned to the clearing house, and in return the clearing house will issue Accumulated Certificates of Exchange (ACEs). One ACE will be issued for each division of 10 troy ounces (and any remainder) in the larger bar. Each ACE will represent an equal share of ownership of the larger bar.
For example, if a palladium bar of 155 troy ounces is registered with the exchange, this can be assigned to the clearing house in exchange for 16 ACEs (i.e 15 × 10 troy ounces, plus 1 for the remaining 5 troy ounces), with each of these ACEs representing ownership of 9.6875 troy ounces (i.e 155 ÷ 16).
10 palladium ACEs will be required for delivery into the Palladium futures contract. The combined weight of these ACEs will depend on the underlying bar, but the weight will always be within the existing tolerance band of 10% of the contract size.
For consistency, standard size bars can also be converted to ACEs. All standard size bars can be converted to 10 ACEs.
ACEs can be held within the exchange’s systems for as long as required. ACEs can be presented to the clearing house and redeemed in exchange for a warrant on a larger palladium bar, provided that the number of ACEs being presented matches the number issued against the warrant.
The exchange will be launching a mini-sized palladium futures contract, with a delivery obligation of 1 ACE. This contract would provide a transparent mechanism for market users to manage their holdings of palladium ACEs. The launch of any new contract is subject to regulatory review.
We are expanding the weight range for palladium so that a wider range of bars are eligible for delivery. Market users wishing to make larger bars available for delivery at the exchange will be able to do so without the expense of re- forming the metal to the correct size.
No, the exchange approved brand list remains unchanged and there are no other changes to the delivery specifications.
Yes, palladium that is on warrant, or eligible to be on warrant now will not be affected by this change.
No. Bars or packages of palladium which are registered with the exchange (i.e. on warrant) can be assigned to the clearing house in exchange for ACEs. This is not requirement, but ACEs will be required if you intend to deliver larger bars against a short futures position. Palladium with weight between 90 and 110 troy ounces inclusive can delivered by warrant, as they are today.
An ACE is an Accumulated Certificate of Exchange. They are issued by the clearing house in exchange for a warrant for palladium with weight greater than 90 troy ounces and up to 192.904 troy ounces (6 kilograms). Each ACE represents an equal part ownership of the palladium represented by the warrant. An ACE has a notional weight of 10 troy ounces. The actual weight assigned to the ACE will be used when calculating delivery payment.
The Palladium futures contract is for a standard 100 troy ounce trading size. The larger bars which are being made eligible for delivery can be nearly twice this size. We want to avoid introducing unfavorable pricing effects into the contract, which might be caused by the size difference. Using the ACE structure as described ensures that the delivery amount is maintained within the existing 10% weight tolerance.
The existing delivery process is familiar to market users, and consistent with other metals products. We do not want to disrupt this process unnecessarily. We will review the delivery process after implementation, when market users are more familiar with the ACE delivery process.
Each ACE represents a share of ownership in a bar or package of palladium, and therefore retains a value. ACEs can be transferred between holders. The exchange intends to offer a mini-sized futures contract to enable an efficient market to develop in individual ACEs, subject to regulatory review.
Only warrant holders can de-register metal and remove it from a depository. Holders of ACEs can request the clearing house redeem then in exchange for a warrant provided they hold enough ACEs to match the warrant. The clearing house may hold warrants which are sized at 10 ACEs, but there is no guarantee of this. Your holding of 10 ACEs would continue to be deliverable against a short futures position. The exchange intends to offer a mini-sized futures contract to enable an efficient market to develop in individual ACEs, subject to regulatory review. This contract could be used to acquire more ACEs in order to match the redemption amount required by the clearing house.
The clearing house will make available to clearing firms information on number and size of palladium warrants it holds in exchange for ACEs.
For the purposes of redeeming in favor of a warrant, all palladium ACEs are considered equivalent. A market user does not need to accumulate all the ACEs relating to a particular warrant in order to receive it at redemption. For redemption purposes, the clearing house will allocate the warrant closest in actual weight, provided that the number of ACEs issued against that warrant matches the number being redeemed. There will be an additional payment required to cover any weight differences.
We have no plans to do this, but we will review the delivery process after implementation, when market users are more familiar with the ACE delivery process, and we will assess the feedback we receive.
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