* CME, ICE models curb queue lengths, rents
* U.S. more liberal in pricing matters than Europe
* Testing competition law is lengthy, highly detailed
By Susan Thomas and Veronica Brown
LONDON, April 4 The way U.S. commodities
exchanges are dealing with warehouses could offer a template for
the London Metal Exchange (LME) to reform its chronically
logjammed storage system, the backbone of the world's biggest
But this route to reform could prove difficult, not least
because competition law in Europe may rule out solutions that
are acceptable in the United States.
A London High Court judge last month quashed a key part of
the LME's long-awaited plan to shorten the queues that users of
aluminium can face to withdraw metal, which they have bought via
the exchange, out of warehouses that the LME oversees.
Big banks and trade houses that own many of the warehouses
in the global network, and charge rent on the stored metal, have
profited from letting companies such as drinks can makers wait
for months or longer to get hold of the raw material they need.
After a tough, divisive consultation among stakeholders, the
LME, which is owned by Hong Kong Exchanges and Clearing
had been poised this month to act on the issue.
But the court upheld an objection from aluminium producer
Rusal, saying the LME consultation process was "unfair
and unlawful" as it presented only one viable option: reduce
queues by limiting how much can be brought in and out each day.
The judge said the LME should have publicly considered
another alternative that it and many experts said repeatedly
would be deemed anti-competitive: banning or capping rent that
warehouse operators charge on metal sitting in queues.
The ruling handed an opportunity to CME Group, which
is launching a challenge to the LME's aluminium contract.
Mindful of problems plaguing the LME, CME has imposed rules
that will prevent warehousing companies from profiting unduly
from long queues and lucrative rents.
CME director of metals research Young-Jin Chang told a
recent conference in the United States that the exchange would
be prepared to intervene to deal with queues longer than 20
days, according to delegates at the conference.
It would first tell the warehouse it cannot charge rent on
the portion of metal that is late. And if CME needs to take
further action, the exchange could forbid the facility from
accepting more metal until the late deliveries are resolved.
The CME is finalising its rules ahead of launch on May 5,
and being ready to clamp down on long wait times will be crucial
for the contract's success, market participants have said.
For copper in CME warehouses, if deliveries go beyond five
days the exchange has a right to tell the warehouse to stop
loading in metal.
Rusal, which has indicated that it might eventually fall
into line with the LME's plan, endorsed CME's approach.
"I'm familiar with structures on the COMEX exchange. I think
something of that type could work very well but it's really a
question for the LME, not Rusal," said Steve Hodgson, Rusal's
sales and marketing director.
The U.S. Commodity Exchange Act, which regulates commodities
markets, restricts clearing houses and exchanges from adopting
rules that could result in unreasonable restraint to trade or
impose a material anti-competitive burden.
But exchanges could impose major changes, such as on rent
charges, if it was considered necessary to keep trade orderly.
A U.S. antitrust lawyer said changes could be implemented if
they were "necessary to achieve the purposes of the Act".
"That's baked into U.S. law," said the lawyer, who did not
want to be named.
Intercontinental Exchange stepped in quickly when
some traders and warehouses in cocoa and coffee, seeing how the
practices adopted in metals gave players a competitive edge,
started looking at the viability of building lucrative queues.
ICE brought in new rules, which became effective on April 1,
forcing warehouses to stop charging rent for goods that have not
been moved within 60 days after a request is made and require
additional information to justify warehouse charges.
The changes followed ICE's acquisition of NYSE Liffe,
including the London-based cocoa and robusta coffee contracts in
November, and aligned Liffe's grading and warehouse keeping
procedures with those of ICE.
But, encouraged by the court ruling against the LME,
European coffee and cocoa warehouse companies plan to seek legal
advice on ICE's new rules.
While that law sets the standards for U.S. commodity
markets, if a U.S. exchange has a subsidiary in Europe which is
registered as a derivatives clearing organization (DCO) or a
registered clearing house (RCH), then the rules are less clear.
"If it's ICE Europe and it's registered as a DCO or an RCH,
there's some ambiguity as to where the line is. If it's a
European exchange or clearing house, it would be a European
matter," the lawyer said.
So the European coffee and cocoa warehouse companies could
have a case, and this also highlights the LME's dilemma.
A blanket global rule on rents would not work.
"In general the U.S. can take a slightly more liberal view
on vertical pricing matters, so they take a rule of reason
approach to a greater degree than the European Commission
typically does," said James Marshall, a senior associate at law
firm Berwin Leighton Paisner LLP.
COMPETITION LAW OBSTACLE
In Europe, one of the LME's key concerns is probably that
banning or influencing rents would be seen as a form of "resale
price maintenance" which will nearly always breach European
competition law, Marshall said.
Effectively this means the LME cannot interfere in warehouse
rent-setting because companies need to be able to set their
The LME has said it is unable to comment on the legal advice
it is receiving.
The other big issue is the LME's unique position as the key
metals trading platform for global price setting - it also
handles metals including copper, nickel, zinc, lead and tin.
"That level of importance restricts the LME's ability to
implement new pricing initiatives because that again raises a
number of competition issues," Marshall said.
"But it's not an entirely open and shut case where you can
say, yes 'you definitely can or can't do it', there's not always
a black line here. Unfortunately it can be a gray area."
There may well be very good reasons for capping or banning
rents, but any pro-competitive and pro-consumer benefits would
need to outweigh any potential detriment to competition.
"There may be ways you can get around the prohibitions if
there are very good reasons to do so, but that's the kind of
thing that has to assessed on a case by case and granular
basis," Marshall said.
"It's a complicated issue to look at in isolation, and it
could take a lot of time and analysis to get to the answer."
(Additional reporting Josephine Mason in New York; Editing by