Senate Democrats Urge CFTC Review of LME Aluminum Trading

The U.S. Commodity Futures Trading Commission should probe the London Metal Exchange to ensure aluminum trading and warehousing are free of manipulation, three Democratic senators said in a letter.

The regulator must investigate whether LME rules sufficiently protect against conflicts of interest between firms’ trading and warehouse operations, Senators Sherrod Brown of Ohio, Elizabeth Warren of Massachusetts and Tammy Baldwin of Wisconsin said in the letter dated yesterday. The review should come before the agency grants full registration to the LME as a foreign trading exchange.

“The CFTC must start protecting businesses and consumers by using their authority to conduct a thorough review of the ongoing issues destabilizing the aluminum market and ensure that the London Metal Exchange is operating above board,” Brown said in a statement.

U.S. agencies including the Federal Reserve and CFTC have been reviewing banks’ involvement in commodity markets over the last year, after brewer MillerCoors LLC and others complained of long waits and steep costs for aluminum. Banks’ commodities business are facing scrutiny from Congress and the Fed, which is considering new regulations.

Steve Adamske, the CFTC’s spokesman, declined to comment on the letter.

The CFTC issued subpoenas last year to Goldman Sachs Group Inc., JPMorgan Chase & Co. and other companies that operated metal warehouses as part of the LME system.

Levin Subcommittee

Senator Carl Levin, a Michigan Democrat, is investigating possible conflicts of interest and manipulation in commodities markets. Levin leads the Senate’s Permanent Subcommittee on Investigations, which may hold a hearing on the topic before the end of the year. The Senate Banking Committee, whose members include Brown and Warren, held a hearing in January.

In their letter, the three senators said the CFTC should review LME warehouse ownership requirements as well as rules that have resulted in long waits for aluminum shipments to end-users such as brewers and manufacturers.

“We have serious concerns that aluminum contracts’ storage and delivery provisions, as implemented and overseen by the LME, are vulnerable to manipulation and have resulted in an inefficient physical delivery settlement process which raises costs for consumers and erodes confidence in the LME,” they said.

Seeking Suggestions

The CFTC should work with the LME and U.K. financial regulators to oversee the exchange rules, the senators said. Congress may be forced to pass legislation on the issue and the senators asked the CFTC for suggestions to improve oversight of LME.

“What we seek as aluminum users is an exchange with transparency, where the rules are designed to help fair and open price discovery,” Chris Thorne, a spokesman for the Washington-based Beer Institute, said in a statement. “We encourage any effort that would throw light on the existing conditions, and hope to work with the LME and U.S. regulators, as well as legislative oversight panels, to make that happen.”

Miriam Heywood, a spokeswoman for London-based LME, had no comment in response to a request outside of normal business hours in the U.K.

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