Winter Park, Florida 09/04/2015 - A US regulator has reportedly deferred an application from the London Metal Exchange to register as a "foreign board of trade", citing worries that the exchange has not yet made enough progress on warehouse reforms, according to a Wall Street Journal report.
Prior to 2011, foreign exchanges such as the LME operated in the US under no-action letter relief granted by the Commodity Futures Trading Commission (CFTC).
But as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the rules have changed. The LME now must become an official foreign board of trade (FBoT), which gives the CTFC more authority to investigate the LME's electronic trading and warehousing system.
This destination also allows US traders to directly access to the LME's electronic trading and order-matching platform.
During the FBoT application process that started in 2012, the LME must prove that it possess all the attributes of an organised exchange, including rules that prohibit abusive trading practices and effective systems that promote financial integrity.
But the CFTC has informed the LME that it will delay its FBOT review until the LME shows that its warehousing reforms take hold, according to a March 24 letter from the CFTC to the LME.
“LME-licensed aluminium warehouses… have caused concerns in the market, particularly with respect to pricing in the US for aluminium, due or related to the length of warehouse queues, particularly in Detroit,” the CFTC letter said, according to the WSJ report.
Over the past several years, US aluminium consumers, such as brewer MillerCoors, have claimed that bank holding companies via their ownership of metal warehouses have taken effective control of the LME, leading to a supply bottleneck and massive unwarranted expenses for consumers in the form of artificially high physical premiums.
The CFTC declined to comment, while the LME told FastMarkets that it does not comment on its communications with regulators.
LAWMAKERS URGE MORE OVERSIGHT
Last September, US Senators Sherrod Brown (D-Ohio), Tammy Baldwin (D-Wisconsin), and Elizabeth Warren (D-Massachusetts) voiced their concerns that LME aluminium storage and delivery provisions are “vulnerable to manipulation and have resulted in an inefficient physical delivery settlement process which raises costs for consumers and erodes confidence in the LME”.
The three urged the CFTC to use existing oversight tools to thoroughly examine aluminium markets used by US participants and to allow sufficient time for Congress to make any necessary legislative fixes through the reauthorization of the Commodity Exchange Act (CEA) before authorizing FBoT, according to a letter dated September 26, 2014.
LME HAS TAKEN ACTION
In the LME's defence, the exchange has made significant changes to its warehousing policies. On February 1, it implemented new load in/load out regulations that requires warehouses with queues of more than 50 days to deliver out more metal than they take in daily.
The exchange has also initiated dialogue on the possibility of capping warehouse rents and FOT rates and banning warehouse operators from charging rent on metal that has spent more than 50 days in long queues to deliver metal out of warehouses.
This discussion period is set to run until May 2, with the LME aiming to update the market a month later.
And there has been tangible evidence that the warehousing tie-up in Detroit is starting to unwind. Aluminium stocks in LME-registered warehouses in the Motor City have fallen to 780,025 tonnes, down 14 percent since the start of the year. Almost all that metal (681,150 tonnes) has been cancelled.
The queue at Metro International's warehouses in Detroit has fallen to about 15 months from 19 months in January.