(Story refiles to insert dropped letter in first paragraph of Tuesday report)
By Pratima Desai and Clara Denina
LONDON (Reuters) - Intercontinental Exchange (ICE) <ICE.N> is looking into setting up a London-based metals trading system, industry sources familiar with the matter said, more than four years after its failed attempt to buy the London Metal Exchange.
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The sources said New York-listed ICE is talking to Martin Abbott, a former chief executive of the 140-year-old LME, the world's largest and oldest market for trading metals.
Abbott, who headed the exchange from 2006-2013, held talks with trading houses and brokers last year about launching a new trading platform for metals in a direct challenge to the LME, a move prompted by discontent over rising trading fees.
Nothing came of the talks but the idea has not gone away, with ICE, which offers New York-based futures trading, showing interest.
"ICE is looking at the possibility of expanding into metals (in London)," one senior broking source said. "We'll look at it if it develops further. Any loyalty we had (to the LME) went a long time ago when they raised fees at a very difficult time for us."
ICE declined to comment, while a spokesman for Abbott said: "As of today I can say that while there has been some informal contact with ICE, absolutely no formal conversations have taken place or are scheduled."
Sources say any new platform would have to cater for industrial users such as consumers and producers who often want physical delivery of metals, requiring a global network of warehouses such as those registered with the LME.
The LME operates a network of more than 600 warehouses, but owners of the facilities are free to store metal that is traded outside the LME.
Exactly how metals might be traded on any new platform has yet to be determined. However, metal bought or sold using over-the-counter (OTC) trade contracts could be delivered from or into these warehouses.
"A combination of physical and cash-settled (contracts) perhaps (might work)," one source close to ICE said.
LME trading ranges from an electronic system to traditional open outcry.
Abbott has been talking to other exchanges since his initial project was shelved due to a lack of financial commitment from the trading houses and brokers involved, sources said.
"That project was abandoned, but the idea woke some people up," a metals industry veteran said. "There are a lot of disgruntled people because of the fees. It was a sledgehammer approach that backfired."
An average 31 percent fee increase at the start of 2015 prompted many consumers and producers to abandon the exchange in favor of OTC trade, hitting LME volumes.
The rise was an attempt to boost earnings for parent Hong Kong Exchanges & Clearing <0388.HK>, which paid $2.2 billion for the LME in 2012, in a bidding process which included ICE.
The LME still dominates metals trading, but its share of overall copper trading has fallen to near 60 percent from 80 percent in 2008, while for all metal traded on exchanges the drop has been to 71 from 87 percent.
ICE launched in 2000 with an electronic platform aiming to bring more transparency and accessibility to OTC energy markets. Since then it has added other futures contracts including on currencies, interest rates, precious metals and iron ore.
It also has a network of clearing houses around the world.
(Additional reporting by Veronica Brown; Editing by David Stamp)