CHICAGO Changes are needed at the London Metal Exchange, many market players agree, with one U.S. senator calling for a regulatory crackdown on banks owning aluminum warehouses as Alcoa Inc. urges increased transparency at the exchange.
Sen. Sherrod Brown (D., Ohio), chairman of the Senate Banking Committees subcommittee on Financial Institutions and Consumer Protection, wants to see the U.S. Federal Reserve issue "clear guidance" on bank holding companies and non-bank activities, such as involvement in physical commodities operations, which he said saddles both banks and taxpayers with too much risk.
The U.S. Commodity Futures Trading Commission (CFTC) also should "crack down" on "anticompetitive practices," such as banks owning aluminum warehouses, Brown said, adding that bank holding companies, "by hoarding physical commodities" such as aluminum, drive up costs of both commodities and everyday products such as soft drinks and beer.
"When Wall Street banks control the supply of both commodities and financial products, theres a potential for anti-competitive behavior and manipulation," Brown said in a statement July 24.
Brown also blasted the proliferation of bank holding company subsidiaries, which he tallied at 14,420 for the six largest U.S. banks. Many of those subsidiaries take part in non-financial activities, such as owning oil pipelines, power plants and metals warehouses, he said, calling on Congress to pass legislation aimed at limiting taxpayer and government support of such non-banking activities.
The moves were applauded by the Beer Institute, a Washington-based trade group representing U.S. brewers and beer importers. "Brewers and beer importers have been paying tens of millions of dollars in higher prices and higher fees for aluminum that is used for cans," Mary Jane Saunders, the groups general counsel, said in a statement.
Alcoa also says changes are necessary at the LME to improve transparency, according in a letter dated July 23 and submitted to the Senate subcommittee of the U.S. Banking, Housing and Urban Affairs committee on July 25, calling on the exchange to improve transparency by establishing trading reports that reveal the nature of market participants (amm.com, July 25).
"Stated simply, the LME does not provide the same quality of information and level of transparency as required by other commodities exchanges, such as those falling under the scope of the U.S. Commodities Futures Trading Commission," the aluminum producer said.
The LME has seen a "dramatic increase" in recent years in trading volumes mostly because of increased activity from financial investors who do not participate in underlying physical markets, Alcoa said. "While Alcoa recognizes that the financial investors are a reality of the current economy, it is imperative that those who participate in the physical aluminum market have confidence in the price-setting mechanism of the LME," the company said.
Alcoa would like to see the LME establish more robust reporting policies so that the influence of financial investors on price discovery might become easier to assess.
Big banks have come under fire recently, with Goldman Sachs Group Inc.s ownership of warehousing company Metro International Trade Services LLC facing scrutiny due to long waits for metal and potential conflicts of interest given Goldmans role in both aluminum storage and trading. The LME said it has worked since 2010 to shorten warehouse queues, also arguing that there is no aluminum shortage in the market, and noted that the exchange is legally prevented from capping rents or preventing trading companies from owning warehouses (amm.com, July 23).