(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Andy Home
LONDON May 2 The London Metal Exchange (LME) is
planning to start publishing a commitments of traders report
(COTR) from July.
This, the LME said in a notice to its members, is in
response to "a general market demand for broader transparency".
The need for more transparency was in fact the only point of
agreement in the polarised argument over what to do about the
long load-out queues at LME warehouses.
U.S. aluminium producer Alcoa, for example, rejected any
need to cut queue length but contended that "today's antiquated
reporting structure of the LME is not providing the pricing
transparency by differentiating between fast money investors and
those that are interested in physical metal supply, raising
questions about the validity of the price determination."
Aluminum fabricators, who called for the LME to slash the
load-out queues, agreed that "it is necessary to improve
transparency at the exchange". Even Goldman Sachs, owner of LME
warehouser Metro, which was behind the original Detroit load-out
queue, joined its voice to the chorus for more transparency.
And what's to disagree about? Greater transparency in any
market is obviously a positive.
It's just a shame that the proposed commitments of traders
report, designed to mirror that published in the U.S. by the
Commodity Futures Trading Commission (CFTC), won't help.
Indeed, it may actually hinder the quest for more
transparency by presenting a distorted picture of the LME
market, as the exchange itself admits.
A FLAWED MODEL
There are two problems with a COTR for the LME, one generic
and one specific to the metals market.
The CFTC reports are severely constrained by the regulator's
legal requirement to preserve the confidentiality of individual
Historically, therefore, it aggregated large positions into
two main categories; commercial traders, the market's good guys,
and non-commercial traders, the much-maligned "speculators". The
remaining small positions were lumped into a "non-reportable"
Commodity markets, however, evolved in ways that defied such
a binary view of the trading world.
So the CFTC launched a revamped disaggregated report in 2009
with new categories; "producer/merchant/processor/user", "swap
dealers", "managed money" and "other reportables".
The LME will in essence borrow this template, albeit with
"swap dealers" renamed as "broker dealer/index trader".
The underlying problem, though, remains the same, namely the
fact that the reports classify traders rather than positions.
As my colleague John Kemp wrote some time back ("Inside the
Commitment of Traders Report", May 9, 2012), a major oil company
will be classified under just one of the categories, even though
its positions might be a mix of hedging and speculative
There are many such examples in the world of base metals
trading, entities such as Glencore and Trafigura defying easy
The problem is compounded by the fact that the CFTC can't
for confidentiality reasons tell anyone how individual companies
have been classified.
The reports, therefore, offer only a partial and potentially
misleading picture of actual positioning at any one time,
amplified by the fact that there is no other data-set for
The LME itself concedes such intrinsic flaws.
"The market is asked to note that the COTR will be
materially affected by the classification of certain large
market users, whose activities arguably fall into multiple
THE NETTING EFFECT
Then, there are specific problems with the nature of the LME
market, which overlays a much larger over-the-counter
Order flows are often netted off against each before hitting
As the exchange also concedes, this will "inevitably result
in the published COTR data reflecting only a subset of the total
activity conducted within the LME ecosystem."
Imagine, for example, a bank member of the LME receiving a
buy and a sell order from a producer and manufacturer
respectively. It will offset the two and hedge only the net
balance position in the market. If it does that with another
bank, it will look like a bank-to-bank "financial" transaction
with no reference to the industrial origins of the order.
There is a real danger that what the LME calls the resulting
"subset" of activity will overweight "financial" as opposed to
This has been a major restraint on the LME going down the
COTR route in the past.
Indeed, the LME in its public consultation document on its
warehousing problems rather pointedly noted the "potentially
cynical rationale" behind the push for a COTR.
"It is interesting to note that merchants, investment banks
and funds will feature prominently in any market open interest
"Both producers and consumers (whose views on the proposal
are otherwise strongly divergent) feel that this information
would be strategically useful, as it will allow them to point to
the role of 'middle-men' and speculators in the market as an
explanation to their stakeholders for price movements which have
adversely affected their businesses."
It even conceded that "the information will undoubtedly be
used by market participants to level further criticism at the
LME" for allowing too much "speculation".
But it's going to publish a COTR anyway.
It's an easy box-ticking exercise to assuage an industrial
user base that feels increasingly disenfranchised by the
financialisation of "its" market, a simmering resentment that
was brought to a head by the problem of queues, caused in major
part by financial players involved in the stocks financing
And to be fair to the LME, a COTR is only one of several
proposals to shed more light on the nature of the exchange's
activity. It will, for example, also be publishing a monthly
report showing warehouse stocks by operator, rather than simply
by location, and detailing load-out queuing times at affected
And transparency, we're all agreed, is, in capital letters,
A Very Good Thing.
Just don't expect too much of it from the proposed LME
commitment of traders report.
(Editing by William Hardy)