* Executives say rules could drive metal out of LME network
* Reporting of storage deals seen violating confidentiality
By Eric Onstad
LONDON, Feb 9 (Reuters) - A new layer of tough rules proposed by the London Metal Exchange (LME) for operating warehouses may boost costs and drive more metal out of the regulated system and into unregistered depots.
The plan would give the LME sweeping regulatory powers to determine whether warehousing firms are behaving badly, even if they are not technically breaking the rules.
It is part of a wide-ranging LME reform package following heavy criticism by consumers of long delays to get delivery of metal and lawsuits accusing banks and commodity companies of conspiring to restrict supply through the warehouse network.
The LME, the world's oldest and biggest market for industrial metals, launched a consultation in November on the rules governing physical delivery and its global network.
The deadline for submitting comments is Monday, but the LME has not said when it will implement any changes.
The proposed regulations are in addition to rules that came into force on Feb. 1 designed to ease huge backlogs to withdraw metal from the global warehouse network.
"The LME is under pressure to do something, but if these (new) rules are implemented, then warehouses are going to be hesitant about taking on more material," said an executive at a warehousing company who declined to be named.
Under the proposals, warehousing companies will have to pay for full annual audits and will likely need to employ more people to make sure they are complying with regulations.
"The warehouses can retaliate somewhat by lifting storage charges if practices become a lot more restrictive and if all these reforms are adopted," said Robin Bhar, head of metals research, Societe Generale in London.
It costs up to 50 cents per tonne to store primary aluminium in LME regulated warehouses compared to a fraction of that in non-LME depots, industry sources said.
"That can only speed up the withdraw from LME sheds to cheaper non-LME sheds. It means we have less visibility. There has always been these huge off-market stealth stocks, which are always difficult to estimate, this would make it near impossible," Bhar said.
If traders and end users do not know how many stocks are sitting in depots, it will be hard to determine if the market is in surplus or deficit, and whether prices are good value.
The 137-year old LME won a major court battle in October, giving it the green light to implement regulations aimed at cutting delivery queues to a maximum of 50 days from up to two years at some depots.
The current consultation resulted from a review of how warehouses operate and a consultant's report on logistics.
The executives said a proposal for warehouse companies to report to the LME details of storage deals would compromise confidentiality agreements with clients.
They were also unhappy that the LME wanted details of transactions at all the company's warehouse depots, even those not registered with the LME, which is owned by Hong Kong Exchanges and Clearing Ltd.
"If they're going to impose this level of interference, it's going to be difficult to be able to think about continuing (as an LME warehouse)," said another warehouse executive.
The warehouse executives and industry sources declined to be identified while the LME was in the midst of its consultation. (Reporting by Eric Onstad; Editing by Crispian Balmer)