LME WEEK 2016: LME toughens up on rule breaches, narrows margin for error

Regulatory scrutiny from the FCA – the UK’s financial watchdog – has toughened the London Metal Exchange’s stance over rule breaches, with the warehousing industry bearing the brunt.

The FCA intensified its focus on the metal industry in 2013 following complaints from consumers that queues to get metal – mainly aluminium – from LME-registered sheds were unacceptably long, pushing physical premiums higher.

In response, the exchange announced in 2013 a twelve-step reform package to stem the queues. And since 2015 it has made it clear that it will not tolerate breaches.

“The LME are getting increasingly tough and fines are coming thick and fast as they react to stricter regulations,” a warehouse source said.

CWT was forced to pay a £100,000 ($122,000) fine last year for failing to establish appropriate “Chinese Wall policies” in its warehousing business.

Metro has been hit hardest, paying a $10 million settlement for an alleged breach of the warehouse agreement in relation to transactions made over September 2010-2013 when Goldman Sachs owned the warehouse company.

In levelling a fine of that magnitude, the LME considered factors including the “adverse publicity and scrutiny as regards the LME” that the transactions brought about and their impact on “the ability of the LME to perform its function effectively”.

The most recent fine was smaller but still a clear slap on the wrists – in September, the LME fined WWS £30,000 for issuing an erroneous lead stock report.

In March, the exchange said that although 31,700 tonnes of lead in Vlissingen would show in the LME stock report as a delivery out, this was in fact a correction of an earlier reporting error made by the warehouser.

While some market participants said WWS got off lightly because its mistake would have affected the output price, others deemed the fine a high one to pay for what was a human error that was immediately reported to the exchange.

In any case, the exchange has drawn a line in the sand. Fines are likely for any future breaches; some participants said that Access World (formally Pacorini) could be next. It is embroiled in a US lawsuit – several galvanizers allege that the Glencore-owned warehouse firm is monopolising the market for Special High Grade (SHG) zinc premiums.

LME member firms also face larger fines after the exchange altered its stance on the treatment of orders executed at prices that are not representative of a fair market.

“The regulators are cracking down,” a senior category I source said.

The LME introduced no cancellation ranges (NCR) regulation in February this year, under which any erroneous trade is adjusted – previously, it would have invalidated the trade.

“Select is monitored on a real-time basis using the tools incorporated within the platform to ensure that member activity is undertaken in accordance with all relevant trading rules and regulations, and that the integrity of the platform is not compromised through misuse,” an LME representative said.

Category II member Mitsui was the first to feel the brunt of these changes – it was fined £80,000 when one of its traders erroneously entered an order into LME Select in backwardation when the prevailing market was in contango.

Realising his mistake, the trader entered five orders in backwardation, hoping that they would be traded and then price adjusted according to the exchange’s error trade policy. This resulted in a loss incurred by an unnamed third party.

Disciplinary action followed; the trader concerned is no longer with the company, Metal Bulletin understands.

As well, for open-outcry trading, the exchange raised fines for ring dealing offences in January last year to “enhance the scrutiny and governance around the LME’s price discovery procedure”.
These range from £500 to £100,000, covering anything from chewing gum, unruly behaviour and failure to act with due care and diligence.

Despite the higher fines, though, the LME’s bottom line will not be affected. According to the FCA, financial penalties can only be used to meet expenses incurred in the course of the investigation of the breach in respect of which the penalty is paid, in any appeal against the decision in relation to that breach or for charitable purposes.