US Senate hearing slams LME, banks, regulators

The chairman of a US Senate subcommittee has slammed the London Metal Exchange, a number of its bank members and the US Federal Reserve for their roles in influencing and overseeing the physical commodities market.

The chairman of a US Senate subcommittee has slammed the London Metal Exchange, a number of its bank members and the US Federal Reserve for their roles in influencing and overseeing the physical commodities market.

At a hearing of a subcommittee of the US Senate Committee on Banking, Housing and Urban Affairs, US Senator Sherrod Brown described the LME rules as being “arcane and hard to understand,” and said the exchange’s membership was effectively a “cooperative” of vested interests setting rules that best suited themselves.

In a statement issued after the hearing, the LME noted it is a regulator of the metals market as well as being regulated itself by the Financial Conduct Authority, formerly known as the Financial Services Authority.

“We are consulting with the metals trade and industry on a proposal to amend the delivery obligations of warehouse companies with long queues. The LME has continuously monitored this issue and has tried to balance the interests of the market as a whole, through the economic cycle,” the exchange added.

US bank ownership
The ownership of warehouses by US banks could potentially be a risk to the US banking system, Brown said, and banks could reduce costs by capitalising on their physical holdings.

The US banks’ physical activities also give them an advantage in proprietary trading because of their knowledge of the buying and selling, storing and transporting of commodities, he added.

Goldman Sachs owns warehousing firm Metro International Trade Services while JP Morgan owns Henry Bath.

There is a serious lack of data and transparency surrounding not just the physical activities of the US banks, but also insight into the decision-making processes of the regulatory bodies and the US Federal Reserve, according to Brown.

“We don’t even know what the regulators seem to be doing. There’s no easy way to learn about practices at banks or the process by which the Fed reviews and approves these activities,” Brown said.

The Fed has “not been forthcoming” with regards its timetable for reviewing US banks’ activities in physical commodities, he added.

Brown was chairing the first ever hearing on the role of US holding banks in physical commodities, set up to scrutinize the activities of Goldman Sachs, JP Morgan and Morgan Stanley in particular. A follow-up hearing is now expected to take place in September, Brown said.

A key witness on the four-person panel of experts brought in to discuss the core issues was Tim Weiner, Global Risk Manager for Commodities and Metals at US brewer MillerCoors.

MillerCoors packages about 60% of the 60 million barrels of beer produced in the USA annually in aluminium cans and bottles, but has faced delays of up to 18 months in getting metal out of warehouses.

Weiner blamed the delays on the warehouse practices of US banks, singling out Goldman Sachs’ Metro for allegedly slowing the load-out rate of physical metal to get increased rent and hiking up premiums in the process.

In response, Goldman Sachs said that it does not deliberately create aluminium shortages or move metal from one warehouse to another in order to earn more rent fees.

“In fact, it is the owners of the metal who direct warehouse operators to dispose of stored metal or transport metal from LME-approved warehouses to warehouses outside the LME system to meet their own needs or objectives,” the bank said.

“The LME warehouse companies do not own the metal in their facilities. They merely store it on behalf of the ultimate owners. In fact, LME warehouses are strictly prohibited from trading all LME products,” it added.

MillerCoors took its concerns to the LME, Weiner told the hearing, but said its ideas for how to change the system were “shrugged off.”

Its discussions with the UK regulator also failed to gather pace, with the brewer being told that the LME is a self-regulated entity. US regulatory body the Commodities Futures Trading Commission and other regulatory bodies meanwhile do not have jurisdiction over the LME, Weiner said.

‘Cooperative of vested interests’
Weiner also criticised the LME for allowing its members to sit on key decision-making committees, including the one that is a key part of debating warehousing issues.

“The real crux of the problem with the LME is the fact that up through December of the past year, the owners of the LME warehouses sat on all the committees to make the rules for the warehouses that they own; so the real problem here is that you have people setting up rules for themselves in a self-regulating exchange,” he said.

“I’d like a transparent and functioning market just like we have here in the US; that’s really the problem that we have here today […] We’re going down the right path [with the recent LME proposals to change the warehouse rules]; this is a great beginning, but these changes are not sufficient to solve the problem,” he added.

Other witnesses giving testimony included Saule Omarova, an associate professor of law at the University of North Carolina; Joshua Rosner, md of Graham Fisher & Co, and Randall Guynn, partner and head of financial institutions group at Davis Polk & Wardewell.

Omarova and Rosner fell firmly into the camp of critics of the US banks’ involvement in physical commodities; Guynn was far more sympathetic to their activities, stressing the centuries-long involvement in the sector by US banks and the need to be wary of what might replace them if they were forced to exit.

Andrea Hotter
Twitter: @andreahotter