LME aims to limit warehouse payments

The London Metal Exchange has tightened rules for owners of warehouses that store its metal, including Glencore and Trafigura, the world's largest commodities trading firms.

The largest exchange for metals such as aluminium and copper says it will require anonymous reporting of monetary incentives paid by owners of warehouses to attract metal to their locations from January next year.

The LME, which was bought by Hong Kong Exchanges and Clearing in 2012, has promised to tackle long queues at its warehouses in the light of complaints from physical users of the metal. A US Senate investigation report last year alleged that Goldman Sachs had used its ownership of a Detroit warehouse company to boost queues to earn more profit by offering incentives.

"The LME has always taken the view that incentives which are abusive are not acceptable, and will require warehouses to report incentives to the LME, so that such activity can be more effectively monitored," the exchange said on Monday. "The LME believes this is crucial in order to ensure an orderly market."

Goldman sold Metro International Trade Services to the Reuben Brothers last year. The major owners of metal warehouses now include Swiss commodities giant Glencore, which owns Pacorini, and Trafigura, which owns Impala.

The LME found that warehouses had committed "significant funds" to paying incentives, it said in documents released on Monday. These included money funded by a third party where the warehouse company acted as a middleman or broker to arrange deals in metal, or where warehouse companies and trading companies agreed to share any profits derived from dealing in LME contracts, it said, citing anecdotal evidence.

Warehouses also sometimes provided introductions between a metal owner and a finance provider, it said. Those banks and trading houses may control or have a relationship with a particular warehouse operator and "may make the use of storage provided by such warehouse operator a condition of the financing transaction".

"It's not right for warehouses to channel profits from trading houses to metal owners," said Matt Chamberlin, head of business development at the LME. Instead, payment should be made directly between the trading house and metal owner, he said.

Warehouse companies owned by trading companies should have barriers to prevent the transmission of confidential information and "any breach of such information barriers will be strictly enforced", the LME said.

The exchange said that while it did not want to ban the payment of incentives altogether, it wanted to prevent the payment of "exceptional incentives" that have a manipulative, distortive or disorderly effect on the market.

The US Senate report detailed how after Goldman bought Metro in 2010 it built the largest aluminium stockpile in the US by paying "freight incentives" to owners to store their metal.

Goldman also approved so-called "merry-go-round" transactions, in which clients were paid cash incentives to load aluminium from one warehouse into another, it said. This artificially lengthened the queue for others seeking to withdraw their metal, bolstering the company's rent.

The LME's network of warehouses are supposed to be a market of last resort for physical delivery of metal so that the exchange's prices better reflect what real users of the metal pay. But high incentives by warehouse companies can distort that, by making it more attractive for producers to send their metal to a warehouse rather than sell it to an end user at a premium above the LME price.

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