Comment: Metal Exchange gets a fair bill of health

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The Independent Online
The London Metal Exchange's way of life and its trading methods are safe, but its culture is not so secure. Yesterday's report by the Securities and Investments Board into the regulatory structure of the LME found it out of the Ark, full of potentially damaging conflicts of interest and in urgent need of an overhaul.

SIB has no evidence of abuse. But to outsiders, the lack of a clear division of responsibility between the board and the executive is deeply worrying.

That explains why the Securities and Futures Authority, which regulates some LME members, has been wary of handing over too much information to the metal market. With the right reforms, that roadblock to a closer co- operation, which is essential to avoiding future scandals, should be removable. The LME had better get a move on.

The LME has nevertheless won a victory of a kind. There is no more talk of a complete overhaul of the very special trading methods. After all, the fundamental cause of the Sumitomo scandal must be sought in Japan. The giant company, hardly in the widows and orphans class, failed to police its own enormous dealings in copper.

Furthermore, it reacted somnolently to warnings from the LME and SIB that something suspicious was going on. And the main companies with which it did business in London were not even LME members, but were regulated by the SFA.

The $2.6bn of losses are therefore hard to pin on the peculiarities of LME trading. The metal market has no segregation of client accounts, LME members are allowed to grant credit to their customers and there are no daily cash payments to cover margins - investor protection features found in all other London markets.

But the Securities and Investments Board has accepted the view of professionals connected with the LME that it should be allowed to continue in its own way.

The reason for this special treatment is that the bulk of LME users either produce or consume the products being traded, and are grown up enough to know what they are doing.

More important, SIB says there is no systemic risk that the whole trading system would collapse if there were a default resulting from lack of segregation of client accounts. This is not a clean bill of health, but it could have been much worse.