Regulatory Scrutiny Now Threatening Ability to Set Metal Prices

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Ironically the phrase used by the London Metal Exchange (LME) of “unintended consequences” with reference to changes to their warehouses rules could equally be applied to governments and regulatory bodies the world over. One unintended consequence of legislator and media attention to alleged price fixing or market rigging allegations is that providers of vital market trading information may become increasingly less willing to provide that information.

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This information of the price at which trades are transacted has generally been provided voluntarily by banks, other financial players and the trade in recognition that all market participants benefit from access to such information and indeed some markets such as the Over the Counter (OTC) markets struggle to operate as efficiently without such transparency.

Traders in London

Just such a situation is reported by Reuters as happening in the OTC gold market where the LME’s clearing house, LME Clear, had been due to take over the clearing service for gold from LCH.Clearnet on Sept. 22, but following an announcement from the London Bullion Market Association, it has decided to withdraw.

LBMA market making members, which include Credit Suisse, UBS, and JP Morgan, have decided that due to increased regulatory scrutiny of the way banks provide data to determine financial benchmarks in the wake of the Libor scandal, this scrutiny has made them less inclined to participate in price-setting processes, and who can blame them? In the case of the OTC gold market, trades will still continue, most have not been cleared via a clearing house but could this be the thin end of the wedge for market participants to withdraw their support for price discovery or reporting services?

Firms such as Platts rely on market participants contributing data for all kinds on commodities for which there are no exchanges. There is a balance to be struck between ensuring contributors behave honestly but still safeguarding a vital service to the markets. A balance that we have seemingly not yet found.

Comment (1)

  1. John Moore says:

    who can blame them?

    They can blame themselves, since their firms have been engaged in price manipulation.

    Why do you not question the reason the forward market makers are less inclined to contribute forward curve data?

    Could it be that this data does not have any grounding in reality and is not reflective of actual trading?

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