Monday, October 7, 2013

Fraud at Commodity Exchanges - International Edition

Fraud seems to be standard operating procedure at commodity exchanges around the world.  First let's go to England where the London Metal Exchange (LME) is "under fire"
"Without doubt, the main focus of most market participants will be the London Metal Exchange’s review of its under-fire warehousing system. . . . . Together with several warehouse owners, the exchange is at the sharp end of regulatory scrutiny and legal action for long wait times to deliver physical metal."
Moving on to India.  The National Spot Exchange Limited (NSEL) is under investigation by the Economic Offences Wing (EOW) of the Mumbai Police

". . . it emerged that clients of the brokers had been allowed to take out unregulated longer-term forward contracts, rather than spot contracts in commodities such as sugar and wheat, the type of physical trade that the bourse was established to handle. As a result, questions arose over whether there was actual delivery of the commodities that were being traded."
 "Sinha, who is leading the EOW probe, admitted that in scale this was the largest he had handled so far. He added his prime objective was monetisation of the assets and tracing the money trail. But, he declined to dwell on the progress the probe had made on these fronts. The investigations so far by the Mumbai EoW have led them to offices and warehouses in 52 cities across 16 states and were conducted by 210 officers and 260 men."

"During the raids, it has emerged that 30 of the about 60 warehouses our teams raided were found to be empty. This indicates that certain traders allegedly connived with the NSEL officials and did not deposit physical stocks in the warehouses for money they received from the investors," the official told PTI.
"Another shocking thing is that four warehouses did not even exist, though they appear on documents seized from the NSEL and others," the official added.
Gold and silver bullion e-series contracts caught up in NSEL investigation:
"MUMBAI: Bombay High Court today said it would pass order on October 7 on whether the settlement of e-series bullion contracts at the troubled National Spot Exchange Ltd (NSEL) should be aggregated with that of the paired contracts being overseen by the Forward Markets Commission."
"NSEL counsel said e-series bullion contracts involved 800 kgs of gold and 43 million tonnes of silver, estimated to be worth Rs 525 crores."
43 million tonnes of silver must be a miss print.  For comparison, silver open interest on the COMEX is about 18,000 tonnes.  Gold trading is probably minimal give recent severe government restrictions on gold importation.  

In the US, fraud is more sophisticated, as this example exposed by the NT Times shows:
"The Commodity Futures Trading Commission has issued subpoenas to Goldman and owners of other major warehouses as part of its inquiry into irregularities in the aluminum market that are believed to have cost consumers billions of dollars since 2010.""The subpoenas seek all internal documents, e-mails, correspondence, voice recordings and other records concerning the warehouse operations dating back to January 2010, according to two people familiar with the documents. The subpoenas also demand documents and correspondence regarding the London Metals Exchange, a private trade association that regulates warehousing. The subpoenas indicate that the federal inquiry has 30 “areas of interest.”"
Interestingly, a couple months ago JP Morgan announced that its commodity business is for sale.  The risk of fines must outweigh the profits.

1 comment:

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