IOSCO surveys warehouse impact on commodity derivatives market

Reuters

LONDON (Reuters) - A global umbrella group for market regulators is surveying the impact of warehouses on price formation in commodity derivatives markets, seeking members' views on issues including potential conflicts of interest in storage ownership.

The International Organisation of Securities Commissions (IOSCO) has asked its members as well as storage and market infrastructure providers, participants and end-users in their jurisdictions to answer a questionnaire by Oct 31.

A years-long issue over lengthy logjams at warehouses owned by Wall Street banks and monitored by the London Metal Exchange (LME) has prompted bitter criticism by consumers and sparked a policy overhaul at the exchange.

The backlog has contributed to the high costs of obtaining physical metal, mostly aluminium.

An industry source said the questions did not target any particular institutions.

"It's not an investigation; it's more like analysing the issues. IOSCO is not in a situation to launch an investigation," the source said. "The findings will provide feedback. There has been a lot of news on this issue (metals warehousing)."

IOSCO, whose members regulate more than 95 percent of the world's securities markets, is working intensively with the G20 and the Financial Stability Board on global regulatory reform, according to its website.

The LME oversees warehouses where companies that buy metals such as aluminium or copper on its futures market can take delivery of quality-assured supplies.

The big banks and traders that own the warehouses and charge rent have profited from allowing the build-up of long queues for buyers to withdraw metal. Some also keep huge stocks of aluminium tied up, unavailable to manufacturers, in long-term financing deals.

The issue has drawn intense political and regulatory scrutiny in the United States.

Besides conflicts of interest, IOSCO's questions also focus on ambiguities about the scope of existing storage infrastructure, operational practices that create inefficiencies in price formation, and ambiguities arising from the process of collecting and disseminating information to the market.

Last year, the LME, the world's oldest and biggest market for industrial metals, proposed rule changes to cut the backlogs in its network of registered warehouses.

In March, a court ruling halted the plan, but the exchange appealed that decision last month. The court has reserved its judgment on the appeal.

In June, Goldman Sachs' Detroit-based Metro International Trade said it was voluntarily complying with the LME's new delivery rules despite the court case. It has also put Metro up for sale.

In March, JPMorgan said it was selling its physical commodities business to trade house Mercuria, which a source close to the matter said included its Henry Bath meals warehousing unit.

(Reporting by Susan Thomas; editing by Jane Baird)

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