(This article was originally published Wednesday.)
By Laura Clarke
SANTIAGO, Chile--The chief executive of the London Metal
Exchange said Wednesday financial regulation, particularly in
Europe, poses a threat to a free market for commodities and to
Europe's market share in the sector. He also said quantitative
easing programs from central banks is also disrupting commodity
markets.
Giving the keynote speech at the Cesco Week dinner, Martin
Abbott spoke on the topic of price formation, free markets and the
threats to that freedom.
The LME itself now has an Asian owner, after Hong Kong Exchanges
and Clearing Ltd. (0388.HK) acquired the London Metal Exchange for
GBP1.39 billion in December, having beaten tough competition from
the likes of CME Group Inc. (CME), NYSE Liffe, the London-based
derivatives arm of NYSE Euronext (NYX), and
IntercontinentalExchange Inc. in an auction process that latest
several months.
Hong Kong Exchanges secured support from LME members, who are
also its shareholders, to buy the exchange in July.
The allure of improved access to Asia, particularly the world's
biggest consumer of metals, China, was key to the LME's original
decision to pick Hong Kong Exchanges as its preferred bidder. In
bidding for the LME, Hong Kong Exchanges pledged to support the LME
in expanding its warehouse network in Asia, expand the number of
mainland Chinese participants and clients, and enhance market data
distribution and connectivity into Asia.
"[The sale] was, I believe, a prescient move by the shareholders
but it does not, in itself, address the impact of regulation in
Europe," said Mr. Abbott.
"Nobody owns the price [of metals], but we have to recognize the
fact that there are some who would like to own it," he added. He
didn't highlight regulators, but politicians.
"Politicians have seized on the populist mood and have quite
deftly pushed the blame for the crisis entirely onto the financial
sector. In doing so they have set up a chorus of somewhat
ill-informed voices calling for markets to be restricted in the
belief that society will be better off without them," he said.
European Market Infrastructure Regulation, or EMIR, is a revamp
of Europe's derivatives infrastructure and clarifies the rules on
customer access to their funds and the transfer of positions in the
event a clearing member gets into trouble. Under EMIR, clearing
houses are required to hold clearing-members' customer cash in
segregated accounts. The exact timing of when this regulation comes
into force for the LME and its members is unclear to the LME, but
Mr. Abbott has warned that it will be costly and will effectively
restrict the ability of banks and brokers to grant credit to
clients.
Earlier in the day, Mr. Abbott spoke of inappropriate
politically-motivated regulation. "It is easy to forget, in the
middle of all of this, that commodities markets played no part in
the global financial crisis. In other words, we now have to deal
with people seeking solutions to problems that do not exist," he
said as he addressed the dinner, warning that the regulation poses
a risk to Europe's standing in the market.
"From a sentimental perspective one would have to lament the
relocation of financial markets and certainly we will continue to
try to mitigate the impact of poorly conceived regulation in order
to prevent that from happening. But a dispassionate view would be
that the location of financial markets does not matter, we are in a
global market and if what was previously considered unthinkable is
now made preferable, then so be it," he conceded.
During his speech, Mr. Abbott also said a major threat to the
commodity markets is quantitative easing and and global loose
monetary policies, leading to a loosening of some fundamental
supply-and-demand dynamics. He also said this was conducive to the
controversial issue of metals being used as collateral in financing
deals, and blocking up warehouses with the potential of restricting
access to metal for end users.
"A surplus of hard commodities will generally lead to a rising
forward price curve, and a surplus of cheap money with a shortage
of real destinations will be inexorably drawn to the surplus
commodities because a simple financing transaction can provide a
virtually risk free return," he said.
"It is not an imaginative use of funds, it is not hugely
rewarding, but it is safe and it is self-perpetuating. The markets
are less volatile because of the damping effect of the weight of so
much surplus money, and, the financiers are here for as long as the
central bankers depress the value of money and make miserly returns
acceptable," he added.
Write to Laura Clarke at laura.clarke@dowjones.com