Against a background of reviving market volumes that has accompanied a recovery of most prices from their low points of last winter, the LME Board and executive staff have been busily completing the changes that we initiated a few years ago. In the past year the LME in common with all other organisations, has worked hard to ensure that it is 'year 2000' compliant.

We are confident that we are.

The exchange has its own formidable strengths, but there are always challenges. There are no immediate threats to the LME's supremacy in its present role, and to the way it trades. Yet we operate in an overall environment in which Exchanges are increasingly making radical attempts to restructure and manoeuvre in order to meet the challenges presented by the electronic age. Both exchanges and members need to cut costs even further by the increased use of technology.

The LME must respond proactively to the challenges. Those include constant pressures from OTC players who continue to develop private electronic trading systems capable of piggy-backing on Exchange traded products and contracts in order to cut costs and reduce regulatory oversight.

Additionally, technology companies are likely to try either themselves, or with others to set up 'Exchange look-alikes' to trade commodity futures and physicals on the Internet.

The global metals industry is re-structuring, and re-thinking its strategic options. It is increasingly moving towards creating larger and stronger units of critical mass to add and release shareholder value. It will seek to cuts costs continuously, and re-examine how it reaches its customers in the modern age. Although the metals industry may be moving inexorably towards global solutions, regional and local aspirations will doubtless encourage attempts to set up regional markets. While motives are understandable the benefits are doubtful.

These and other challenges in a rapidly changing environment mean that we cannot afford to be complacent and to rest on our hard-won laurels. We must adapt and adjust in such a way that we can continue to be the largest, the most liquid, and the most cost-effective Exchange.

Our membership operates under an extremely competitive environment. They are increasingly called upon to make substantial investments in terms of capital and manpower to continue and even enhance the services they presently provide. While nobody owes them a living, we as an exchange have to ensure that we are able to help them to create long-term value and returns commensurate with the commitments they are called upon to make.

Internet trading has its role. However, it must be emphasised that this is an unpoliced highway. It is clearly possible to trade metals on the Internet but not that easy to replace Exchange supervised trading. There is a tremendous advantage in continuing to use a well-tested market like the LME which ensures discovery of global prices with the highest degree of transparency, liquidity, cost effectiveness with the ultimate option of physical delivery where required. The more the units of global metals industry increase in size, the greater becomes the need for an independent market like the LME to reassure the ultimate customers that they are not being disadvantaged.

A clear regulatory framework and an exemplary warehousing system would be of little value if the Exchange were to become irrelevant to the evolving requirements of the industries it serves. We always have to keep our contracts up to date and produce new ones to meet perceived needs. Last year I announced that we were minded to introduce two new contracts. We have taken that intent further. We launched our new silver contract in May. Approved warehouses have already been listed in London, New York, Rotterdam and Singapore with others to follow. We are well on the way to realising our goal of widespread international delivery points. This month sees the acceptance of silver grains as good delivery, giving the contract a unique relevance for the physical silver trade. We have largely completed the modernisation and improvement of our regulatory framework. The other new development is our LMEX Index Contract. It will track the performance of our base metal contracts. I am pleased to announce that futuresand options trading in this contract will commence on April 10th, 2000. Extensive consultation and deliberations have evidenced a clear appetite for such a product from the wider investment community.

We are always receptive to well-argued proposals for new contracts and invite suggestions. There are however, more important issues to consider at the present juncture.

First we should fully recognise the LME's strengths. The LME closely interacts with the metals industry and users. With its international membership and client base it is a truly global market. It is well regulated, with its regulatory and commercial roles clearly separated.

It is a liquid and transparent market, effectively operating for 24 hours a day, with a credible price discovery mechanism. The mix of inter-office and open outcry trading in the ring presently meets the needs and expectations of users and regulators. The Exchange is highly cost-effective, both in terms of its total running costs, and of the costs of using it. Its system of brand registrations helps both producers and users, and facilitates business. A good spread of warehousing and other facilities help the LME fulfil its role as a physical market of last resort. We believe that ring trading continues to deliver liquidity, transparency and cost-effectiveness, along with a credible price discovery mechanism. We have no wish to abandon it. We shall keep the ring system so long as there is clear evidence that our members and customers want to conduct a significant amount of business through it.

We are, however, committed to the urgent creation of the capacity to move an increasing amount of pre-market and after hour's business to automated trading systems. This will give us the flexibility to replace ring trading with such a system if and when such a move is considered appropriate and necessary. The pace of change will be dictated by the needs of the customers and the market. We shall not be seduced by the fashions of the day, whatever those might be, if they do not properly meet those needs. A few years ago we built a prototype electronic trading system. We did not take it to completion because there was no justifiable reason to do so. For many months now we have been spending a lot of time, effort and resources on selecting and adopting a more updated automatic trading system. There is a clear programme to complete this work within an urgent and well-specified time frame. Over its long history the LME has demonstrated its ability to evolve and change proactively. We are now working towardsmeeting the challenges of the new electronic age. Within this fast changing economic climate we have to ensure that we are ready and able to take decisions with speed and flexibility. This is why we have set up, under my chairmanship, a task force, consisting of a working group of directors including, David King, the Chief Executive to look at all aspects of our business that might be affected by our strategic technological initiatives and to suggest changes if and where necessary, in areas like membership structure, financial structure and governance. e shall interact with our members on these and other issues in the weeks and months ahead - and keep our users informed. (Excerpted from LME chairman Lord Bagri's speech he delivered in London at the LME dinner on October 12, 1999)