In Letter to CFTC, Senators Call for Investigation of Aluminum Warehousing Practices

Brown’s Banking Subcommittee Held Hearings Examining Bank Holding Companies’ Ownership of Physical Commodities

WASHINGTON, D.C. – Today, U.S. Sens. Sherrod Brown (D-OH), Tammy Baldwin (D-WI), and Elizabeth Warren (D-MA) sent a letter to the Commodity Futures Trading Commission (CFTC) urging a thorough review of the London Metal Exchange (LME) – the largest exchange for aluminum futures – before approval of the LME’s application as a foreign board of trade (FBOT). The Senators pointed to concerns with ongoing irregularities in the trading of aluminum contracts and warehousing practices as need for further action.

“We urge you to immediately use the Commodity Futures Trading Commission’s (CFTC) existing oversight tools to thoroughly examine aluminum markets used by U.S. participants and to allow sufficient time for Congress to make any necessary legislative fixes through the reauthorization of the Commodity Exchange Act (CEA) before authorizing foreign boards of trade (FBOT) through the CFTC’s FBOT registration process,” the Senators said.

“American manufacturers and end users should not be gouged every time they make a can of soda or fill up their gas tank,” Brown said. “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 before finalizing the LME’s authority as a foreign board of trade.”

In January, the Senate Banking Subcommittee on Financial Institutions and Consumer Protection  convened by Subcommittee Chairman Brown, held a hearing entitled, “Regulating Financial Holding Companies and Physical Commodities” that examined the aluminum end users concerns over alarming reports of bank holding companies (BHCs) controlling the price and supply of physical commodities. 

BHCs have been accused of using LME metals warehouses to control the supply of particular commodities, including aluminum, potentially driving up the cost of everyday products like gasoline, canned soft drinks and beer, and electricity for Ohioans.  Historically, BHCs have been restricted under the Bank Holding Company Act (BHCA) from engaging in commercial activities. In recent years, BHCs have utilized a number of waivers and loopholes in the law, with occasional sign-off from federal regulators, to expand business operations into physical commodities and energy. Brown’s hearing shed light on the industry’s practices and focused on the high costs manufacturers and consumers pay because of artificially high prices driven by Wall Street banks.

According to a July 2013 investigative piece by the New York Times many Wall Street megabanks hoard commodities and thereby drive up prices for consumers and manufacturers. The practice also creates a potential for anti-competitive market behavior and manipulation. In November 2013, the LME announced new rules for unloading aluminum from its warehouses, but a U.K. court struck those down last April. In January 2014, the Federal Reserve began the formal process of revising its policies governing bank ownership of physical commodities.  

The full text of the letter to the CFTC can be read below.

September 26, 2014


The Honorable Timothy Massad
Commodity Futures Trading Commission
Three Lafayette Center
1155 21st Street, NW
Washington, DC 20580
Honorable Mark P. Wetjen
Commodity Futures Trading Commission
Three Lafayette Center
1155 21st Street, NW
Washington, DC 20580
The Honorable Sharon Bowen
Commodity Futures Trading Commission
Three Lafayette Center
1155 21st Street, NW
Washington, DC 20580 The Honorable Christopher Giancarlo
Commodity Futures Trading Commission
Three Lafayette Center
1155 21st Street, NW
Washington, DC 20580

Dear Mr. Chairman and Commissioners:

We write to express our deep concern with the ongoing irregularities in trading of aluminum contracts and the warehousing and physical delivery of aluminum to end users. While we have raised aluminum market issues with you and your staff during hearings before the U.S. Senate Committee on Banking, Housing, and Urban Affairs and the Committee on Agriculture, Nutrition, and Forestry; in letters; and throughout the confirmation process for the newest Commissioners, our many concerns remain unresolved. We urge you to immediately use the Commodity Futures Trading Commission’s (CFTC) existing oversight tools to thoroughly examine aluminum markets used by U.S. participants and to allow sufficient time for Congress to make any necessary legislative fixes through the reauthorization of the Commodity Exchange Act (CEA) before authorizing foreign boards of trade (FBOT) through the CFTC’s FBOT registration process. 

First, we urge the Commission to ensure that the London Metal Exchange (LME), the largest exchange for aluminum futures, is operating in compliance with the CFTC’s standards before approving its application for registration as an FBOT. 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. Problematic LME rules include:

· Insufficient warehouse load-out rules and practices for LME aluminum contracts that have resulted in end users waiting in queues for as many as 683 days to take delivery of aluminum, despite high levels of production and large amounts of aluminum waiting in storage for delivery;
· Inadequate rules requiring the institution of “Chinese walls” between their warehouse companies and trading operations to prevent conflicts of interest between their commercial investments and other financial activities – such measures may be useful in theory, but ineffective in practice;
· Rules preventing warehouse owners from storing their own metals in their warehouses, but allowing the parent company of a warehouse owner to store metals in a warehouse owned by one of its subsidiaries; and
· Overly restrictive LME rules that prohibit only “unreasonable” incentive payments, a vague term that is open to abuse. As the LME itself acknowledges, warehouse competition is conducted on the basis of high incentive payments, and such payments are “significantly . . . linked to the existence of [aluminum] queues[,]” yet it has taken no steps to address this structure.

We remain extremely concerned that these conditions are adversely affecting the ready supply and pricing of aluminum and threaten the entire aluminum market.

The FBOT registration process, as allowed by the Dodd-Frank Wall Street Reform and Consumer Protection (Dodd-Frank) Act and defined by the Commission’s regulations, provides an opportunity for meaningful market oversight that protects U.S. end-users and consumers. It is critical that the CFTC use this opportunity to examine the LME’s practices and to work with the United Kingdom’s Financial Conduct Authority (FCA), other regulatory authorities, and the LME to ensure that the LME meets the standards the CFTC set forth in its FBOT registration rule. 

Second, if the CFTC is unable to work with the LME and the FCA to come to a resolution that fully addresses the delivery issues facing end users, Congress may be forced to legislate in this area. In that event, we request that the CFTC refrain from approving LME’s application for registration as an FBOT until Congress has had the opportunity to address distortions in aluminum futures trading and delivery by taking appropriate legislative action through the CEA reauthorization process. It would also be useful for CFTC to suggest any legislative changes to the CEA that might improve the CFTC’s authority and oversight concerning the LME and other FBOTs. 

Finally, market observers and end users have reported that record queues and large stockpiles of aluminum built up in LME-approved warehouses have distorted the market and hurt end-users’ and consumers’ bottom lines. These serious concerns deserve a full investigation by the CFTC to determine the full effects of the current load-out delays and storage fees and to determine whether the sometimes mutual interests of futures traders and LME warehouse owners resulted in any activities that would be inappropriate under the CEA.

We ask that the CFTC immediately examine the effects that the current warehousing system – including its structure, regulation, and fee system – have on futures trading, U.S. manufacturers, and U.S. consumers in order to determine whether the LME and its U.S.-based warehouses are in compliance with all applicable U.S. trading laws.

The CEA and Dodd-Frank gave the CFTC important tools to ensure that commodity markets operated at home and abroad provide a safe and level playing field for U.S. traders and end users. The CFTC should use all available tools to ensure that the aluminum market is once again an efficient place for price discovery that serves businesses and consumers.

Thank you for your attention to this important matter.  

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Press Contact

Meghan Dubyak/Ben Famous (Brown): (202) 224-3978

John Kraus (Baldwin): 202-224-5653

Lacy Rose (Warren): 202-224-4543