TREVOR TARRING: Who will guard the guards?

There is a Latin phrase attributed to the Roman poet Juvenal which reads “Quis custodiet ipsos custodes?” or “Who will guard the guards?”

In more modern parlance, it means that whenever you see someone pulling the strings, there will be someone behind them higher up the tree who really controls what is going on. Or if there is not, then there should be.

This is very apposite to thelandmark acquisition of the London Metal Exchange (LME) by Hong Kong Exchange & Clearing (HKEx).

There is no reason to doubt the seriousness of the undertakings HKEx has given to maintain the particular (others may say idiosyncratic) features of LME trading. These notably include ring trading, daily prompts and a higher throughput of physical trading on the market than on other exchanges.

Hard-nosed commercialism says that it is ring trading, with its higher costs than electronic trading, that is likely to come under scrutiny first, once the promised standstill period comes to an end.

But one could also forgive the HKEx board if they saw the LME’s warehouses – with the recent and ongoing controversial reluctance of some of them to speed up delivery performance – as something of a poisoned chalice.

But all these speculations become meaningless once one starts asking “Quis custodiet…?”

HKEx is constituted in Hong Kong, a territory that ceased to be a British colony in 1999. It is now squarely part of China, albeit one that still has a degree of autonomy not enjoyed by any other Chinese city. No need to ask “Quis custodiet…?” about HKEx. Ultimately it will do as Beijing wishes.

Two questions must be asked
So we have two questions. The first is what the profit motive will do to HKEx’s management of the LME in the medium-term future, and the second is what aspects of LME operations might, as far into the future as we can see, upset the Chinese government enough for it to tell HKEx to make changes?

It is even possible that the Chinese government might be so pleased with the way things are going under HKEx that it will unexpectedly nudge it in a direction beneficial to the LME and its users.

This is a good moment to remember that the LME has never been free of government interference – normally the UK government – but also those of the USA, Russia and the EU in smaller ways.

Nothing has interfered with LME trading in the last 60-odd years as drastically as the Attlee government’s refusal to allow it to resume trading until eight years after the end of the second world war.

More recently, the LME’s demonstration of its strength as a principals market in the aftermath of the Tin Agreement collapse could not prevail over governmental pressure to convert to a cleared market.

There’s still a lot to look out for. And there’s no good way of predicting when or how externally imposed change might be coming.

Trevor Tarring 
editorial@metalbulletin.com