COMMENT : A sudden moment of triumph for the SIB

`The SIB was both diligent and effective in pursuing allegations of manipulation in the copper market. And it eventually found out who was responsible'

It looks like a case of egg on face for the London Metal Exchange and a "well done" pat on the back for the Securities and Investments Board. The LME could hardly have been more unfortunate in the timing of its announcement that all was well in the turbulent copper market. Within hours, Sumitomo had confessed to the world the activities of its home-grown rogue trader Yasuo Hamanaka. The LME's ignorance of Mr Hamanaka's antics might seem bad enough; to make matters worse, it was another British regulator, the SIB, which uncovered the mischief. How could the LME, one of the world's premier metal markets, have been so asleep at the wheel?

To be fair on the LME, it appears to be the case that it is both powerless to act over and ignorant of much of what goes on in the London copper market. A substantial part of futures and physical market activity in copper takes place over the counter, professional-to-professional (or not so professional as the case may be). Since such activity is outside the LME's sphere of influence, it is also unsupervised and unregulated. When rumours first surfaced about possible manipulation of the market towards the end of last year, the LME was forced to seek the assistence of the SIB, with its wider powers of investigation among those outside the regulatory net. Sumitomo, despite extensive trading through the LME, is not a member of the Exchange, nor does it come within the ambit of any other UK regulatory authority.

The full story of how the SIB found out about Mr Hamanaka's activities has yet to be told, but it certainly seems to be the case that it was the SIB that alerted Sumitomo to a potential problem. Mr Hamanaka himself was another Nick Leeson, albeit a cleverer, more high powered and more persistent one. To cover up losses, Mr Hamanaka was forced to take ever larger positions, digging himself ever deeper into the mire as he tried to gamble his way out of it. Mr Hamanaka was what is known in Japan as a bucho. This is a very privileged and senior position in Japanese business and it helps to explain why he was able to get away with it for so long. His superiors would have had total trust in what he did. His trades would have been accepted without question and he would have been almost completely unsupervised.

Like Daiwa, Barings and Kidder Peabody before it, then, this seems to have been another case of inadequate internal banking controls rather than a failure of outside regulation. Indeed, the SIB has rather managed to turn the whole episode into something of a triumph for the UK regulatory system. Leaving aside the little matter of the LME's embarrassment, the SIB was both diligent and effective in pursuing allegations of manipulation in the copper market. And it eventually found out who was responsible. Furthermore, Japan now moves brisquely ahead in the score card of financial scandals. London as a financial centre is boosted accordingly. Whether regulators and investigators prove as robust in pursuing the UK end of Mr Hamanaka's activities remains to be seen. If the Sumitomo affair follows precedent, it seems certain that there would be a UK conduit for his trades. The possibility of collusion cannot be ruled out. There is perhaps still time for the LME to vindicate itself.

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