US may seek to curb metal trade

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The Independent Online
The Sumitomo copper scandal and its global fall-out may spur the US to pass legislation to extend for the first time regulations covering US metal traders to foreign exchanges with operations on American soil, notably the London Metal Exchange.

Last week, after Sumitomo's pounds 1.2bn-plus losses caused by rogue trader Yasuo Hamanaka, top UK watchdog the Securities and Investment Board started a thorough review of the whole LME market, not just copper.

Regulators are also looking at activities of brokers, including Winchester Commodities, which dealt with Mr Hamanaka. The Securities and Futures Authority decided earlier this year, on the evidence available, not to discipline Winchester over dealings surrounding $200m of losses caused by a rogue trader at Chilean copper firm Codelco.

A spokeswoman for the New York Mercantile Exchange (Nymex) confirmed this weekend that its chairman, Daniel Rappaport, is pressing Congress to grant authority to the Commodity Futures Trading Commission (CFTC), the federal oversight body in the US, to apply current US regulations on disclosure and reporting to foreign exchanges with storage facilities the US.

It is two years since the LME opened warehouses in the US, notably in Long Beach, California. The move dismayed Comex, the LME's smaller US counterpart and part of Nymex, which feared that the presence of the warehouses would further diminish its share of the world trading market. Those fears have not been borne out, but the lack of transparency of dealings through the warehouses is still a concern.

"We hope that the CFTC will have the power to regulate any exchange that offers delivery in the US," said the spokeswoman, Nachonah Jacobowitz. Such action by Congress, which is also being proposed by New York Representative Charles Schumer, would involve amending the Commodity Exchange Act. The changes could force the LME to divulge details about customer accounts and report large trades, even if they are not being conducted on US exchanges.

It would also be a step towards harmonising the starkly different practices of the Comex and the LME. American regulators have long regarded the LME as something of a "gentlemen's club", with insufficient government oversight. Comex operates strictly on a cash basis, whereas the LME accepts letters of credit.

Reflecting his disdain for the LME's US warehouses, Mr Rappaport has been known to refer to them as "roach motels" with insufficient controls and supervision and low reporting standards.

It is not a charge David King, the LME's beleaguered chief executive, is willing to accept. "Comex's criticisms stem purely from competitive grounds," he said. "We have 95 per cent of the world copper market, they have 5 per cent." He grants that changes may be needed. "We must wait to see what arises from the current investigations."

Representative Schumer wrote to the CFTC at the end of May asking whether it would favour having some authority over the LME to, he said, "protect the public interest in commodities prices from improper conduct on a foreign board of trade".

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