LONDON (Reuters) - Traders at commodity heavyweights JPMorgan, Mitsubishi Corp and Trafigura are declining to give price assessments to reporting agencies for key metals like copper and aluminium in the wake of the Libor rate-rigging scandal and the Platts oil-price probe.
While the move by individual traders or trade teams does not yet threaten the validity of recognised metals benchmarks, it constitutes an unwelcome side-effect of rigorous legislation proposed by the EU on commodity benchmarks.
EU regulators last month published a draft law on financial benchmarks, aimed at regulating price reporting agencies (PRAs) and banking panels compiling benchmarks of pan-EU significance, plus market sources who submit data to them.
The draft law follows public outrage at European banks for fixing the London Interbank Offered Rate (Libor) late last year and an EU probe this year into suspected manipulation of oil benchmarks compiled by Platts, part of McGraw Hill Financial Inc MHFI.N.
Although the proposed law will likely focus on Libor and some widely used oil indexes, it has unnerved some in metals, who see their benchmarks as especially vulnerable to charges of “manipulation”.
“If they want to regulate the market, no problem, but you can’t force people to quote numbers. I won’t quote anything, I will only quote to my customers,” said an industry source at a commodity trade house.
PRAs like Platts and Metal Bulletin canvass producers, consumers, brokers, and traders for their assessment of a metal’s benchmark price. The identity of these participants is not revealed, and the assessments they give can be based on bids and offers rather than actual deals done.
Metal benchmarks compiled by PRAs are used to price multi-million dollar industrial deals. They are comprised of price assessments for “premiums” or surcharges paid over the London Metal Exchange cash price to cover physical delivery costs.
“The prices we give are open to interpretation, and regulators could misconstrue that. There’s really no incentive whatsoever to report prices to a publication,” another industry source said.
Platts said that since around the time of the Libor incident, they have seen one or two companies that have established a policy of not contributing to metals benchmarks.
The trend has already been seen in natural gas, where some energy companies, trade houses and banks have stopped submitting data to PRAs. However, participation in oil price benchmarks remains robust.
“It may be the transparency of the process that provides oil market participants with a lot of confidence to report prices. All stakeholders have a clear view of who is participating and all the details around their transactions,” said Dan Tanz, head of editorial at Platts.
Metal Bulletin, which unlike Platts compiles benchmarks exclusively for the metals markets, said a couple of companies had stopped contributing since the Libor incident and the Platts probe.
“One or two organisations have scaled back participation but on the whole we have seen no material impact on our overall data collection,” said Raju Daswani, Metal Bulletin managing director.
“There are major organisations that have set up internal protocols that ensure that they send us a complete set of spot market data rather than being selective.”
Also adding pressure to traders are preliminary probes by two U.S. regulatory bodies of metals warehousing businesses owned by big banks and trade houses, following years of complaints about inflated prices.
A Trafigura TRAFG.UL spokeswoman said the company has had policies in place for several years on not contributing metals or oil prices to PRAs. JPMorgan (JPM.N) declined to comment while Mitsubishi (8058.T) said the company allows its traders to give contributions to reporting agencies.
Thomson Reuters (TRI.TO), parent of Reuters news, competes with PRAs in providing news and price information to commodity markets.
Additional reporting by Susan Thomas and Silvia Antonioli; Editing by Veronica Brown and David Evans