* Warehousing an important link between LME, physical market
* Long-term reliability vital for market, LME reputation
By Susan Thomas
LONDON, Oct 8 (Reuters) - Britain’s financial watchdog homed in on the London Metal Exchange’s (LME) warehousing crisis, stressing the importance of its global storage network to maintain the integrity of the market.
“There is no doubt that the long term reliability of warehousing arrangements is vital for confidence in the integrity of the market and its reputation,” Financial Conduct Authority’s chief executive said on Tuesday
“Hence the reason we will continue to promote appropriate levels of integrity, and transparency, in the market as we move forward,” Wheatley said in remarks prepared for delivery at the annual LME dinner.
The LME, the world’s biggest marketplace for industrial metals trading, has proposed rules to overhaul its delivery system from next April that would force warehouses to release more stocks once the wait time breaches 100 days.
The plan is a response to backlogs in deliveries from the LME warehousing network that have inflated the surcharge to obtain physical metal, sparking complaints from consumers. The complaints have led to a string of U.S. lawsuits.
“The key issue here in relation to the commodities derivatives markets is clearly the importance of maintaining a credible link to the underlying commodity, where there’s convergence between futures and physical,” Wheatley said in notes prepared for delivery at the annual LME Dinner.
“And that, in a nutshell, is why warehousing is such an important issue: maintaining that link between LME and the physical market, which in turn allows you to provide a global reference price for the metals market.”
The LME approves and licenses a network of more than 700 warehouses in 36 locations around the world to support the mechanism of physical delivery of LME futures contracts.
But its reputation as a market of last resort has been shaken because companies with warehouses registered by the LME have found a lucrative business in building up big stocks, charging rent for storage and delivering metal out of storage only at a limited rate.
“There’s a big commercial responsibility on regulators. Not a responsibility to create profits for firms or prevent businesses failing....but certainly a responsibility to create the broad market conditions that support growth and good outcomes,” Wheatley said.
His comments follow closer regulatory scrutiny of the LME’s warehousing system. The FCA and the Commodity Futures Trading Commission (CFTC) and the Department of Justice in the United States have all signalled they are probing the issue.
The FCA regulates the exchange and the futures derivatives market for commodities but not warehousing or the physical markets.
But as warehousing and the physical market have an important role in LME operations, the FCA has a regulatory interest in the consultation, an FCA spokeswoman said.
The three-month consultation on the LME’s proposal ended on Sept. 30 and the exchange’s board is due to make a decision this month or next month. If approved, new rules will come into effect next April.