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
"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
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
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).