LONDON (Reuters) - Britain’s financial watchdog said officials are visiting commodity warehouses in Europe to see how they operate, in preparation for tough new EU market abuse rules as regulators focus unprecedented scrutiny on physical trading practices.
For decades, traders have made money from their knowledge of shortages and surpluses of physical commodities, which they say enables them to play a vital role in balancing global markets.
But pressure from campaigners and politicians to crack down on what they see as speculators pushing up commodity prices, coupled with concern over possible rigging of market benchmarks, are putting commodities on a tighter regulatory leash in Europe.
The European Parliament last month endorsed a political agreement on Market Abuse Regulation (MAR) which will put in place rules to prevent, detect and punish market abuse.
The rules are designed to stamp out rigging of commodity and interest-rate benchmarks, forcing transparency on multi-trillion-euro markets that have previously escaped scrutiny.
Under MAR there will also be increased cooperation between financial and commodity regulators.
“We have lots of forthcoming changes coming in under MAR, and that’s going to give a much stronger regulatory emphasis to the physical commodity market,” a Financial Conduct Authority (FCA) spokeswoman told Reuters.
“So as part of that we have been visiting a number of physical market participants and infrastructure providers as part of preparation for that. We have visited warehouses in a number of jurisdictions.”
Industry sources confirmed that FCA officials had visited commodity warehouses in recent weeks and had asked about their operations.
In the face of shrinking profits, many trading firms and banks have sought to extend their control of supply chains through buying physical assets such warehouses and refineries.
The FCA’s move comes as the London Metal Exchange (LME), the world’s largest metals marketplace where benchmark prices for metals like copper and aluminium are set, grapples with its crisis-hit warehousing system.
The LME is consulting with the FCA on proposed sweeping changes to its warehousing policy after complaints from end users including major beverage can makers about long wait times for metals and inflated costs.
“The regulators here always want to be involved in these things, so yes,” LME Chief Executive Garry Jones said last week when asked if the LME was working with the FCA on its warehousing consultation.
To support physical delivery of its contracts, the LME approves and licenses a network of more than 700 warehouses across 36 locations around the world.
But the business has stoked controversy as warehouse firms have made money by building up stocks and allowing queues to grow for clients seeking to withdraw material, all the time charging rent for storage.
End users say those steps have caused long wait times in warehouses which have distorted supplies and inflated physical prices to record highs.
The LME launched a consultation on the proposals in July, and is still considering the responses from the metals industry. It is due to hold a board meeting this month to discuss the plan, but there is no date yet for an announcement.
“We regulate the LME but we don’t directly oversee their warehouses, but as we have a regulatory interest in them we have an interest in the consultation,” the FCA spokeswoman said.
“There is a lot of discussion about particularly the LME and particularly aluminium. This is a separate piece of work to that driven by changes in MAR.”
The LME, along with Wall Street banks Goldman Sachs (GS.N) and JPMorgan (JPM.N) and mining and metals company Glencore (GLEN.L), have been hit with more than 10 lawsuits by consumers, distributors and others alleging aluminium price fixing.
U.S. regulators and politicians have also questioned whether Wall Street’s involvement in risky commercial activities could pose a threat to their financial soundness as they try to end the era of the “too big to fail” banks.
Reporting by Susan Thomas; Editing by Veronica Brown and David Evans