The City's senior regulator was proposing a seven-point programme of improvements at the LME, the result of a six-month investigation into regulation of the metals market.
The inquiry was launched in the summer after Yasuo Hamanaka, a copper trader at Sumitomo, ran up losses of $2.6bn (pounds 1.6bn) for his employer, and SIB is to monitor progress at the LME over the next 12 months..
The SIB report said there had been occasions when conflicts of interest ruled out so many board members of the LME from an active interest that a special committee of the chief executive, including a co-opted outsider, had to be set up to deal with market developments.
SIB made no allegation that conflicts of interest had led to abuse of inside information obtained while regulating the metal markets. But it made clear its concerns about the seriousness of the risks arising from the market's organisation.
The report said: "In order to secure the confidence of users of the LME, it is also essential that the board as a whole and its individual members are seen to have ensured that they do not misuse information gained for regulatory purposes."
There should be a clear separation between regulatory tasks and the commercial activities of the exchange "so that confidentiality of information can be seen to be preserved".
The LME board should formally delegate responsibility for monitoring trading to the executive and it should "continue to arrange its affairs so that it does not have access to market-sensitive information and should make clear publicly that this is the case".
One of SIB's recommendations is that the LME creates a post of head of market regulation and enforcement to give a "higher profile and a sharper focus at a senior level" to regulation and enforcement. Raj Bagri, chairman of the LME, insisted that there had never been any problem in practice but agreed that the SIB recommendation would prompt changes in LME organisation and an increase in the number of independent directors, which he expects to rise from one to at least three. The staff of 44 will rise by about a fifth.
Mr Bagri said: "It is not just a question of doing the right thing but of being seen to be doing the right thing."
The report was attacked by David Threlkeld, a copper trader, who warned the LME about Mr Hamanaka's activities in 1991. "You need a new executive entity on the LME with teeth and powers to put a stop to corruption and fraud."
The SIB report came down against radical changes in the distinctive way the LME operates, which arises from its deep involvement with producers and end users of metal.
But it urged more independent directors and an exchange of information with the SFA.