(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Andy Home
LONDON Nov 27 December 2010 and the copper
market was booming.
On the London Metal Exchange (LME), three-month metal was
charging to the then all-time high of $9,550 per tonne, and
front-month spreads were tightening.
LME reports at the time showed a single entity controlling
over half of all eligible LME stocks, leading to a frenzy of
speculation as to just who was squeezing the copper market.
JPMorgan was "outed" in the media as the controlling
hand, which only fuelled further the whirl of speculation, given
the same bank was proposing to launch an exchange-traded fund
backed by physical copper.
As is always the way with such things, JPMorgan declined to
confirm or deny its involvement.
Now, thanks to documents submitted to the U.S. Senate
subcommittee investigating U.S. banks' involvement in physical
commodities, we know that it was indeed JPMorgan that was
holding that dominant position.
The nature of its positioning was a lot more nuanced than
the headlines of the time suggested.
But the subcommittee has highlighted one highly anomalous
and curious fact about copper.
U.S. banks such as JPMorgan do not have to declare their
holdings of copper to banking authorities in the same way they
do for other physical commodities.
That's because both the Federal Reserve and the Office of
the Comptroller of the Currency (OCC) classify copper not as a
base metal but as bullion.
ALL THAT GLITTERS IS NOT GOLD
There has been a long-running game of cat-and-mouse between
the U.S. banks and authorities as to the amount of physical
commodities the banks can hold.
There are two stand-out restrictions among the multiplicity
of contested grey areas.
The OCC limits banks to settling no more than 5 percent of
their derivative transactions by taking physical delivery of
commodities. The Federal Reserve limits financial holding
companies to conducting complementary physical commodity
activities at no more than 5 percent of their Tier 1 capital.
But not included in the count are gold, silver, platinum,
palladium and ... copper.
Historically, only gold and silver were classified as
bullion by the U.S. authorities. But the definition was
broadened in 1991 to include platinum, at the request of the
National Bank of North Carolina, and again in 1995 to include
Copper was added to the list just months after palladium at
the request of an unidentified bank because, according to the
OCC, "copper, like platinum and palladium, has been used to mint
It's a curious interpretation, since as the subcommittee
noted in its report, "the penny, the U.S. coin most closely
associated with copper, has been composed of 97.5 percent zinc
But there it is. As far as the OCC and Fed are concerned,
copper is officially "bullion", which means that U.S. banks do
not have to declare their holdings to either body.
Just as well for JPMorgan, because the documents it handed
over to the subcommittee show that, even with some aggressive
accounting techniques, staying within the Fed's 5 percent Tier 1
limit in other commodities has been a continual headache.
It breached the limit in January 2012 thanks to a colossal
aluminium position totalling 3,501,365 tonnes and worth around
$7.48 billion. The bank was forced to lend 100,000 tonnes to the
market and another 400,000 tonnes to an affiliate to get back
below the threshold.
The task of complying with Fed and OCC rules would have been
even more difficult were JPMorgan's copper holdings included,
given they reached a maximum of $1.65 billion in 2010, $2.72
billion in 2011 and $1.22 billion in 2012.
Graphic on JPMorgan's copper holdings in 2010 and 3-month
Graphic on JPMorgan's copper holdings and short-dated spreads:
Which brings us back to the frenzied events in the copper
market at the end of 2010 in the count-down to the LME's Dec. 15
prime prompt date.
JPMorgan supplied detailed copper stock holdings figures to
the subcommittee covering the period from Oct. 14, 2010 through
March 30, 2011.
These show that the bank's copper stocks peaked at 213,000
tonnes on Dec. 13, at which stage they amounted to 64.5 percent
of LME non-cancelled stocks.
A large portion of that position was sold back to the market
on Dec. 15, and the holdings dropped to 56,000 tonnes. But not
before the position generated massive tension in the nearby
structure of the LME market.
"Tom-next", the shortest-dated spread in the LME's arcane
system, flared out to $13 backwardation on Dec. 14. That was the
cost per tonne of rolling a short position for one day. The
benchmark cash-to-three-months spread widened to $70
backwardation the day before.
So the market was right about who was squeezing the London
Or was it?
The LME market is a hall of mirrors, with big beasts such as
JPMorgan dealing for themselves and/or for clients at any one
It turns out that the bank had not itself taken a massive
punt on copper in the way both market and media proclaimed.
JPMorgan's legal counsel wrote to the subcommittee that "in
late 2010 JPMorgan's copper warrant position on the LME
reflected its ongoing and sustained trading activity, including
trades involving more than 50 different JPMorgan clients".
(Letter from Steven Ross, Akin Gump, to Carl Levin, chairman of
the subcommittee, dated Oct. 31, 2014)
"The trade data does not appear to support the theory that
JPMorgan's copper warrant position was the result of a single
large trade," it added.
And another thing.
"Finally, we note that JPMorgan's copper holdings during
this time frame and at all other times, were related to its
customer business and not to the then-proposed JPM XF Physical
CONFLICT OF INTEREST
Ah yes. The proposed physical copper ETF that provoked so
much outrage among copper consumers the world over.
JPMorgan was one of several financial players looking to
replicate the success of physically backed ETFs in the gold
market in industrial metals such as copper.
Or, if you're reading this at either the U.S. Fed or OCC,
that should read "replicate the success of physically backed
ETFs in the gold market in other bullion markets."
JPMorgan's proposed ETF, with holdings of up to 61,800
tonnes, was put on ice in the face of a fierce rearguard action
by U.S. copper consumers and Senator Carl Levin, chairman of the
The fear was that the fund would fuel ever higher prices by
removing metal from a market that was in palpable deficit.
There were also concerns about the inherent conflict of
interest involved when the same entity runs high-volume
positions in the copper market and offers an investment vehicle
backed by the physical market.
It doesn't matter that the ETF was the brain-child of the
asset management arm of JPMorgan, not its trading arm. Nor that
the December 2010 squeeze had nothing to do with the fund's
proposed launch. The timing was always wrong for that purported
linkage to be anything other than conspiracy theory.
The problem is that the potential conflict of interest was
hard-wired into the proposition because of the overlapping
interests of JPMorgan in being fund promoter, trading
facilitator and storer of the metal, the latter in the form of
its Henry Bath warehousing operations.
There is an analogy with Goldman Sachs' ownership of LME
warehouser Metro and its role in the aluminium market.
"Chinese walls" can be proven to be effective to financial
regulators, but they'll never be effective in terms of outside
Which is why Goldman Sachs has been fending off regulatory
scrutiny, lawsuits and media criticism for the last couple of
GOOD-BYE TO ALL THAT?
Things have changed a lot at JPMorgan since those heady
copper market times of 2010.
The company has this year disposed of its physical commodity
assets, including the Henry Bath metals warehousing business, to
It will revert to being a "pure" broker in terms of LME
But that doesn't mean that it couldn't amass client
positions to the point of market dominance again. And if it does
so in the copper market, it still won't have to include those
holdings in meeting the limits imposed by the Fed and the OCC.
Nor will any other U.S. bank as long as copper is deemed to
And while it is, to quote the subcommittee's report, "copper
will continue to provide a loophole that can be used to
circumvent otherwise applicable physical commodity safeguards
important to protecting U.S. taxpayers from risks related to
physical commodity activities".
(editing by Jane Baird)