The U.S. commodity regulator is taking a harder stance on metal-market activities, the latest example of how the agency is using expanded powers granted to it after the financial crisis.
Last month, the Commodity Futures Trading Commission warned the London Metal Exchange, the world’s biggest metal-futures market, it would have to eliminate bottlenecks at its warehouses if the exchange wants to solidify its status in the U.S., according to a letter The Wall Street Journal reviewed last week.
Friction between the two entities threatens to upend the way manufacturers price everything from car batteries to water pipes. The LME is one of the few venues in the world where metals such as lead, zinc and nickel are actively traded, enabling producers and consumers to lock in prices for these raw materials. If the CFTC were to block U.S.-based traders from conducting business on the LME, that could force a scramble to find alternative ways to hedge and potentially roil markets, experts say.
The warehouse bottlenecks have persisted for more than five years at some storage facilities, according to LME data. The snarled supplies have increased the cost of aluminum to consumers, who must pay a surcharge to get around the logjam and receive their metal promptly.
Experts see the CFTC’s letter as part of a negotiation strategy. The regulator wants the LME to reform its warehouse system without denying the exchange a more permanent gateway to U.S. markets. The LME applied in August 2012 to become a foreign board of trade in the U.S., which would benefit the LME by granting it a more permanent access to U.S. markets and place it on equal footing with U.S. exchanges.
“It might be a tactical consideration. (…) When you delay (registration), you’re trying to induce the other side to take the step that you want,” said Saule Omarova, a law professor at Cornell University.
An LME spokeswoman said the exchange doesn’t comment on its communications with regulators. The CFTC declined to comment.
The CFTC letter is the latest move in a longrunning controversy over how metal warehouses operate, particularly those that house aluminum. Currently, it would take about nine months for aluminum stored in Detroit to be delivered, according to LME data.
“The CFTC’s action shows that the agency is serious about using its authority to protect consumers and businesses,” Senator Sherrod Brown, (D., Ohio), said in a statement emailed to The Wall Street Journal.
U.S. lawmakers have criticized the LME’s slow response and held hearings on the issue in 2013 and 2014. In a September 2014 letter, Sens. Brown, Elizabeth Warren (D. Mass.) and Tammy Baldwin (D. Wis.) urged the CFTC to probe the LME’s trading and warehousing practices for manipulation before it approves the LME’s application.
The Dodd-Frank Act, a package of financial- and consumer-protection reforms enacted in 2010, gave the CFTC stronger powers to impose stricter regulations and oversight on commodity-market operations.
In early April, the CFTC charged Kraft Foods Group Inc. and Mondelez Global LLC over alleged manipulation of wheat prices in 2011, a test for the regulator’s increased flexibility in targeting price-control schemes.
The LME currently does business in the U.S. under a so-called “no-action letter” from CFTC staff, which provides relief from certain U.S. regulations the LME doesn’t comply with but can be withdrawn at any time.
“The no-action letter is an informal process granted by the staff and more easily reversed,” said Geoffrey Aronow, partner at Sidley Austin LLP in Washington D.C., and a former director of the CFTC’s enforcement division.
That system is being replaced by the more rigorous registration process that gives the CFTC greater authority over the LME, but also grants the foreign exchange more permanent access to U.S. markets.
– Ese Erheriene contributed to this post.
SOURCE: MoneyBeat – Read entire story here.
