Letter to Chairman Gary Gensler, Commodity Futures Trading Commission - Manipulation of Aluminum Market

Letter

Senator Debbie Stabenow (D-MI), Chairwoman of the U.S. Senate Committee on Agriculture, Nutrition and Forestry, today called on the Commodity Futures Trading Commission to clarify the role and responsibility of the agency in addressing recent allegations that owners of U.S. warehouses, overseen by a UK-based commodity exchange, are intentionally slow-walking the delivery of purchased aluminum to profit from storage fees. The allegations also charge that these owners are distorting the market price of aluminum to their advantage. News reports and congressional testimony have indicated that consumers are bearing the brunt of skewed market prices for aluminum, paying billions dollars more a year for goods from canned beverages to cars because of price distortion.

In a letter to CFTC Chairman Gary Gensler, Chairwoman Stabenow wrote, "Buyers of aluminum allege that the current market price of aluminum is being skewed by those who own and profit from the storage of metal at warehouses. They allege that warehouse rules dictated by the London Metal Exchange's Warehouse Rules and Regulations committee have been set by and for the benefit of those who stand to profit from the rules, even if it works against consumers and a fair market price ... As Congress looks to reauthorize the CFTC, we need to determine if there are any gaps in oversight and whether there is sufficient authority to deal with those gaps, and act."

Chairwoman Stabenow raised questions concerning the CFTC's role overseeing the London Metal Exchange and these metal warehouses, and pressed the agency to share if it possesses clear authority to investigate potential violations of the Commodity Exchange Act in this instance.

"These are serious allegations. I am writing to encourage you to further review this issue and clarify the role and responsibility of the Commodity Futures Trading Commission to address the situation."

The full text of Chairwoman Stabenow's letter is below.

July 30, 2013

Dear Chairman Gensler:

Recent reports in the news media and in Congressional testimony have raised questions about policies governing warehouses that store metal, and the impact that these policies have on the market price of aluminum and what consumers pay for goods ranging from canned beverages to cars.

In Congressional testimony, buyers of aluminum allege that the current market price of aluminum is being skewed by those who own and profit from the storage of metal at warehouses. They allege that warehouse rules dictated by the London Metal Exchange's Warehouse Rules and Regulations committee have been set by and for the benefit of those who stand to profit from the rules, even if it works against consumers and a fair market price. They noted that the LME itself gets a portion of the rent charged for storing metal at warehouses it oversees. Additionally, they raised questions about companies that both help set the rules dictating the flow of aluminum in and out of warehouses and also engage in the futures and swaps markets -- implying a potential for price manipulation. These are serious allegations. I am writing to encourage you to further review this issue and clarify the role and responsibility of the Commodity Futures Trading Commission (CFTC) to address the situation. In particular:

1. Does the CFTC have jurisdiction, directly or indirectly, over metal warehouses located in the United States?
2. Does the agency have a direct oversight role over the London Metals Exchange, in particular its rules that govern metal warehouses?
3. Do you believe there are other regulators who are accountable for monitoring this behavior? If so, who?
4. If the agency does not have sufficient authority to look at this issue, but you believe it should, what authorities would you recommend Congress adopt?
5. If an entity controls or manages physical supplies of a metal in such a way that they could influence the spot market price and then simultaneously traded in those metals in the futures, options, or swaps markets, would the agency have clear authority to investigate that entity's behavior for potential violations of the Commodity Exchange Act (CEA)?
6. The CFTC issued a staff no-action letter in 2001 that granted LME access to US-based customers. In it, the CFTC noted that the LME rules must comply with UK regulations that require members of the LME to "promote high standards of fair dealing and integrity in trading."

- What is the status of this no-action relief?
- Has the CFTC evaluated the LME and its policies, or its status as a registered entity, since the no-action relief was granted over 12 years ago?
- Will the agency require the LME to register as a Foreign Board of Trade (FBOT)?
- When approving an exchange's application to operate as a Foreign Board of Trade, does the CFTC look at potential conflicts of interest in the governance structure?
- Could the agency make any registration approval contingent on changes to current exchange rules?
- How does the agency's cross-border interpretive guidance impact this issue?

Given the CFTC's role in protecting and preserving the integrity of commodity markets, I ask that you further examine this issue and provide answers to these questions in writing. If you have doubts about the authority of the agency to ensure markets are safe for trading and free from fraud or manipulation, this Committee needs to know. As Congress looks to reauthorize the CFTC, we need to determine if there are any gaps in oversight and whether there is sufficient authority to deal with those gaps, and act. Thank you for your attention to this matter.

Sen. Debbie Stabenow

Chairwoman, U.S. Senate Committee on Agriculture, Nutrition and Forestry

Source