LONDON Banks and trading companies have been ordered by the U.S. Commodity Futures Trading Commission (CFTC) to preserve documents ahead of a possible investigation into warehousing activities, sources said.
The ownership of London Metal Exchange-listed warehouse companies by such banks as Goldman Sachs Group Inc. and JPMorgan Chase & Co., as well as large trading houses like Glencore Xstrata Plc, has drawn criticism from physical market participants after large incentives offered to suppliers to move metal into warehouses sent physical premiums to record highs over the past year.
European duty-paid aluminum premiums peaked at $290 to $305 per tonne in January, while the waiting times for deliveries from Metro International Trade Services LLCs warehouses in Detroit, owned by Goldman Sachs, and Glencore-owned Pacorini Srls Vlissingen location in the Netherlands blew out to more than a year.
"We and others have talked to regulators like the CFTC and the (Financial Conduct Authority in the United Kingdom), and its become clear that there is a gap in regulation over warehousing and some aspects of the commodities business," one aluminum consumer said. "As long as there is a lack of regulation, and as long as banks continue to operate, we will continue to see anomalous behavior."
Regulators are now preparing for a thorough review the warehousing business and the role that banks and trading companies play within it, and sources said this could lead to action being taken to limit the role of banks and trading companies within the warehousing industry.
"If implemented, this will address the queue problem," one trader said.
It comes as a U.S. Senate Committee on Banking, Housing and Urban Affairs subcommittee focused on financial institutions and consumer protection prepares to meet in open session July 23 for a hearing aimed at examining financial holding companies and whether banks should control power plants, warehouses and oil refineries" (amm.com, July 17).
On July 1, the LME proposed new rules concerning warehouse delivery rates in an attempt to alleviate the huge delivery queues that have developed at certain warehouses. The exchange has suggested linking daily stock inflows and outflows to steadily reduce the queues at locations where they have grown beyond 100 days.
Aluminum premiums fell as warehouse incentives dipped following the announcement.
A version of this article was first published in AMM sister publication Metal Bulletin.