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LME launches warehouse electronic tracking system to avert fraud

LONDON (Reuters) - The London Metal Exchange (LME) has launched its electronic tracking system for warehouses, which aims to guard against the type of fraud that emerged at a Chinese port in 2014, an executive said on Thursday.

Men walk past the London Metal Exchange (LME) in London, July 22, 2011. REUTERS/Paul Hackett

LMEshield provides electronic receipts as proof of ownership for stored metal, with the capacity to give security for tens of millions of tonnes of material outside the LME’s own network of registered warehouses.

It was developed in response to requests from the metals industry and banks which finance metal after a private metals trading firm, Decheng Mining, allegedly duplicated warehouse certificates stored at Qingdao Port to pledge a metal cargo multiple times as collateral for bank loans.

“LMEshield is now live, and the first receipt has been issued by Henry Bath & Son Ltd on behalf of BNP Paribas Arbitrage SNC,” Matthew Chamberlain, head of business development, told the Reuters Global Base Metals Forum.

LMEshield is available in 19 jurisdictions, including countries new to the LME storage network such as India, South Africa and Chile, Chamberlain added.

The new service aims to provide the same security as the LME’s existing Sword system, which provides the origin and title of metal delivered against LME futures or stored in LME-certified depots.

But while Sword is restricted to refined metal of certain grades approved for delivery against LME contracts, the new system will broaden its scope to include other grades of metal, ores and fabricated products.

“We’ve seen considerable interest even in these early stages... We have about 20 warehouse companies, metals traders and banks active in our working group,” Chamberlain said.

Chamberlain said a separate warehouse tracking system would be developed in China linked to the development by the LME's owners, Hong Kong Exchanges and Clearing Ltd. 0388.HK, of a mainland China spot commodities trading platform.

“A key element of this platform will be a mainland warehouse receipting platform offering the same security and efficiency as LMEshield, but further optimised for the demands of the mainland market,” Chamberlain told the forum.

Warehouse operator Henry Bath joined a partnership with the LME in March along with CMST Development and Mercuria Energy Trading to register warehouses along China’s silk road trade route.

In the first phase of the project, Henry Bath is due to list one of its warehouses as an LMEshield facility along the 21st Century Maritime Silk Road, which runs from China through Southeast Asia.

Additional reporting by Melanie Burton in Melbourne; editing by Jason Neely and Susan Thomas