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LONDON (Reuters) - Following the introduction of new market abuse regulation last year, the London Metal Exchange did not submit any suspicious transaction order reports (STORs) for three months, setting off alarm bells at the UK regulator, metal industry sources said.
Suspicion of a failure to ensure adequate surveillance processes caused the Financial Conduct Authority (FCA) to investigate and issue an informal warning, they added.
The Market Abuse Regulation became effective across the European Union on July 3. Firms and trading venues in Britain can submit STORs through the FCA's website.
"The LME didn't submit any STORs after the new regulation came in until after September," a source close to the matter said.
The LME and FCA declined to comment.
Some sources said the LME having to vacate its Finsbury Square offices between July 18 and Sept. 1 due to structural issues may have exacerbated the problem, but that the main issue was surveillance.
There was also internal discord over the push to attract high-volume funds, brokers said.
That, they said, was a concern for Charles Li, chief executive of parent Hong Kong Exchanges & Clearing (0388.HK), which bought the 140-year old exchange in 2012 for $2.2 billion.
An average 31 percent fee increase at the start of 2015 prompted consumers and producers to abandon the exchange in favour of over-the-counter (OTC) trade, hitting LME volumes.
The downtrend was reinforced last year by economic and demand slowdown in China, the world's top consumer of industrial metals, which subdued prices and activity, triggering an exodus of funds to other markets with higher return potential.
LME volumes overall in 2016 slid 7.7 percent after a fall of 4.3 percent in 2015. However a 5.6 percent drop in copper trading compared with a 26.7 percent surge in trade on the U.S. rival CME Group's (CME.O) exchange, which sources say is easier and cheaper to use for funds.
Reporting by Pratima Desai; Editing by David Evans