LMEWEEK-Britain's financial watchdog backs LME's warehousing consultation

Reuters

* 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 homedin on the London Metal Exchange's (LME) warehousing crisis,stressing the importance of its global storage network tomaintain the integrity of the market.

"There is no doubt that the long term reliability ofwarehousing arrangements is vital for confidence in theintegrity of the market and its reputation," Financial ConductAuthority's chief executive said on Tuesday

"Hence the reason we will continue to promote appropriatelevels of integrity, and transparency, in the market as we moveforward," Wheatley said in remarks prepared for delivery at theannual LME dinner.

The LME, the world's biggest marketplace for industrialmetals trading, has proposed rules to overhaul its deliverysystem from next April that would force warehouses to releasemore stocks once the wait time breaches 100 days.

The plan is a response to backlogs in deliveries from theLME warehousing network that have inflated the surcharge toobtain physical metal, sparking complaints from consumers. Thecomplaints have led to a string of U.S. lawsuits.

"The key issue here in relation to the commoditiesderivatives markets is clearly the importance of maintaining acredible link to the underlying commodity, where there'sconvergence between futures and physical," Wheatley said innotes prepared for delivery at the annual LME Dinner.

"And that, in a nutshell, is why warehousing is such animportant issue: maintaining that link between LME and thephysical market, which in turn allows you to provide a globalreference price for the metals market."

The LME approves and licenses a network of more than 700warehouses in 36 locations around the world to support themechanism of physical delivery of LME futures contracts.

SHAKEN

But its reputation as a market of last resort has beenshaken because companies with warehouses registered by the LMEhave found a lucrative business in building up big stocks,charging rent for storage and delivering metal out of storageonly at a limited rate.

"There's a big commercial responsibility on regulators. Nota responsibility to create profits for firms or preventbusinesses failing....but certainly a responsibility to createthe broad market conditions that support growth and goodoutcomes," Wheatley said.

His comments follow closer regulatory scrutiny of the LME'swarehousing system. The FCA and the Commodity Futures TradingCommission (CFTC) and the Department of Justice in the UnitedStates have all signalled they are probing the issue.

The FCA regulates the exchange and the futures derivativesmarket for commodities but not warehousing or the physicalmarkets.

But as warehousing and the physical market have an importantrole in LME operations, the FCA has a regulatory interest in theconsultation, an FCA spokeswoman said.

The three-month consultation on the LME's proposal ended onSept. 30 and the exchange's board is due to make a decision thismonth or next month. If approved, new rules will come intoeffect next April.

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