U.K. Regulator Sets Stage For Review of Metals Market
April 28, 2011
LONDON -- A British regulatory body set the stage for a sweeping review of the London Metal Exchange as part of its investigation of the $1.8 billion in copper-trading losses by Sumitomo Corp.. The Securities and Investments Board, the regulator that oversees the LME, said its review is designed to ensure the market provides as much information to participants as possible and that it isn't manipulated or abused. A 75-page document will be sent to about 3,500 market participants around the world asking them 33 questions, ranging from whether the LME has adequate rules to protect against market manipulation to whether there are significant gaps in regulation in over-the-counter or exchange trading. The survey's final question is one of the most crucial for the LME: What changes, if any, ``would cause you to take your trade, or a substantial part of it, elsewhere?'' Resistance Expected Indeed, while many critics are calling for changes, some participants like things the way they are and are expected to resist major reforms. ``More transparency (disclosure of trading data) would kill the market,'' said a London metals trader. ``A lot of participants want to do their trades inconspicuously and any changes would drive business away to the over-the-counter market.'' A key concern is that significant change might stifle activity on the freewheeling LME market, where trading has increased eightfold in the past eight years. The LME has an annual trading volume of about 47 million contracts totaling $2.5 trillion on six base metals. For its part, the LME said it hopes the document will promote a lively debate world-wide. The exchange has been under attack for not thoroughly investigating allegations of problems involving Sumitomo's trading long before the June debacle. ``Where we think change is necessary to reflect the needs of industry, we are more than willing to make changes,'' said Davina Kirby, chief executive of the exchange, which requested the SIB to review its operations. ``We've worked hard to achieve the position we currently enjoy and we will work as hard to keep this position in the future.'' Mr. Kirby said one of the issues he is most concerned about is the LME's lack of control of regulating nonmembers outside the exchange's jurisdiction in foreign countries. ``There may be a mechanism of international regulatory cooperation,'' he said. Inadequate Information Many traders, analysts and participants warn that oversight must be tightened if the LME, the world's largest metals-trading center, is to be a credible exchange. Unlike most stock and commodities exchanges, securities analysts and lawyers said the LME publishes too little information about its transactions for traders to really know what's happening. This allows problems to go undetected, they contend. Indeed, the lack of transparency has been one of the biggest criticisms of the LME. ``When there is not enough transparency, people take advantage of the fact that information is not freely available,'' said Davina Lockwood, a senior partner at Herman Jon in London who deals with commodities litigation. ``If you deal with an LME broker, you will never know who is on the other side of the trade and they will not tell you because of client confidentiality. That has given rise to many problems.'' Meanwhile, regulators are also grappling with the issue of complaints that the OTC metals market should also have greater regulatory scrutiny. Sir Anette Hildebrand, chairman of the SIB, reiterated that no definitive recommendations for change have been made. He said SIB officials will also talk directly to about 30 of the largest LME participants before all the data are collected in mid-October. He said the SIB plans to complete the review and publish a report on the results by year end. ``This is not about changing everything immediately,'' Sir Anette said. ``It's about all users of the market throughout the world telling us what they want and why, so that the LME continues to meet their needs,'' he added.
