The London Metal Exchange proposed changes designed to strengthen its powers to investigate and prevent market abuse at warehouses amid scrutiny of delivery backlogs.
The proposed rule changes represent the latest step in the LME’s efforts to reduce wait times for receiving metal. The exchange, which monitors a network of about 700 depots, plans to require warehouses to submit more information to ensure companies aren’t distorting the market, according to an e-mailed statement yesterday.
Aluminum consumers including MillerCoors LLC last year complained that LME-authorized warehouse operators were constraining supply and inflating costs, drawing attention of U.S. lawmakers and regulators. The proposals add to earlier reforms to reduce logjams at some LME-approved warehouses and are part of a broader effort to step up regulation of banks owning physical commodities.
“It’s a question of cleaning up the shadowy things that are going on,” Edward Meir, an analyst at INTL FCStone Inc. in New York, said by phone. “It’s going to be a lot more work for warehouses. I’m sure these banks that still have warehouses will be more inclined to get rid of them.”
Photographer: Simon Dawson/Bloomberg
The reform proposals come after the LME’s court victory last month over United Co. Rusal, which sought to block rules aimed at reducing warehouse logjams. The Moscow-based company said in October it was seeking to increase transparency in the market and that the appeal court’s ruling “will do little to address the problems caused by disparities between the LME price and premiums or the general lack of transparency.”
Charles Watenphul, a spokesman for Glencore Plc, owner of the warehousing business Pacorini Metals, declined to comment. Michael DuVally, a spokesman for New York-based Goldman Sachs Group Inc., wasn’t immediately available to comment. The New York-based bank owns Metro International Trade Services LLC. Elena Morenko of Rusal said today that the company had no comment.
The wait time to remove aluminum from Metro-operated warehouses in Detroit was 702 days in September while the removal time from Pacorini’s depots at the Dutch port of Vlissingen was 625 days, according to LME’s report published last month on its website.
The LME said last month that it will require warehouses with waits exceeding 50 days to load out more metal than they take in, starting in February. The minimum metal delivery requirement for warehouses with the biggest stockpiles is 3,000 metric tons a day, with extra rates applying to nickel and tin. The bourse said yesterday that it wants to require storage companies to release an additional 500 tons of aluminum alloy a day, which will help bring contract prices closer to the physical market, the notice said.
The exchange will also require warehouses to appoint an independent auditor to count all of the stock each company holds in bourse-approved depots, according to the proposal. It currently tracks 10 percent.
Counting all stockpiles will give “an additional level of assurance that all warrants are backed by physical metal” after the Qingdao port probe, the LME said in a notice to members. Chinese authorities earlier this year discovered the same metal in the port of Qingdao was pledged multiples times to secure different loans.
The LME said it wants to add a code of conduct that bans behavior to manipulate the market, such as creating or maintaining a queue for metal delivery. It also plans to take disciplinary action against any price-distorting behavior.
The exchange said the consultation on the proposed reforms and changes to its rules for approving warehouses will run until February.
By Agnieszka de Sousa and Laura Clarke