* London Metal Exchange, NYSE Liffe to launch changes on
* Reforms to control steep rents and long waits for
* Regulator aims to ensure market integrity, orderliness
By Susan Thomas
LONDON, Feb 4 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
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
"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.