British watchdog to keep close eye on commodity warehouse reforms

Tue Feb 4, 2014 8:24am EST

* London Metal Exchange, NYSE Liffe to launch changes on April 1

* Reforms to control steep rents and long waits for commodities

* Regulator aims to ensure market integrity, orderliness

By Susan Thomas

LONDON, Feb 4 (Reuters) - Britain's Financial Conduct Authority said it plans to keep a close watch on commodities warehousing to ensure that reforms in storage policies by the London Metal Exchange (LME) and NYSE Liffe are carried out effectively.

Rents charged by warehouse firms to store metals such as aluminium - and the often glacial rate at which stocks are delivered out of sheds to LME clients while charges continue being levied - have aroused complaints and lawsuits.

Coffee and cocoa markets copied some of these controversial business models, but both the LME and NYSE Liffe are now making changes to warehousing practices in the markets they oversee.

David Lawton, director of markets at the FCA, said the financial regulator seeks to ensure exchanges' derivatives contracts, including warehousing arrangements, are anchored to the price of the underlying products.

"Last year there was a lot of commentary over whether the current arrangements were appropriate, and we have seen recently some exchanges change their warehouse policy in response," Lawton said in a speech prepared for the International Capital Markets Association lecture in London on Tuesday.

"We will seek to ensure that the impact on market integrity and orderliness is fully co-ordinated."

The LME, which is the world's largest marketplace for industrial metals and is owned by Hong Kong Exchanges and Clearing Ltd, supervises a global network of warehouses that hold stocks of the right quality to deliver against its futures contracts.

When a buyer such as a manufacturer takes delivery of a warrant for a batch of actual metal, however, it has no say in where that material is stored.

The new owner pays rent until it can either move the metal to another warehouse with cheaper rent, use it, or sell it on, while the warehouse company - often owned by a large bank or trading house - has no incentive to move out stock.

Last year the LME cracked down on the practice by some warehouse companies of building up large stocks of metal and then taking up to a year to deliver it out.

The new rules, which come into effect on April 1, include slashing maximum wait time to 50 days.

NYSE Liffe last month revised its cocoa and coffee storage rules so that, from April 1, warehouses will have to stop charging rent for goods that have not been moved within 60 days after a request is made. It will also require additional information to justify warehouse charges.

Lawton said an influx new investors into commodities futures in the last decade - a reference to financial players - had changed the relationship between physical and derivatives markets.

"A lot of work is going into understanding how this affects the price discovery process in the commodity markets and the signaling which future prices provide of commodity fundamentals," he said.