LME to launch an improved metal-tracking system

The London Metal Exchange (LME) is launching an electronic system to better track material stored outside its exchange warehouses in response to a financing fraud in China that roiled banks and trading.

The new system, called LME Shield, will launch in December this year, and will allow the exchange to provide electronic receipts for metal stored outside its system, LME head of business development Matt Chamberlain said during a presentation at Metal Bulletin's International Aluminum Conference in Vancouver.

Chamberlain had previously told Reuters that the world's oldest and biggest metals market was considering expanding its electronic LMESword system, which proves the origin and title to LME-warranted metal, beyond exchange stock after receiving requests from several banks that finance big tonnages of metal.

In the wake of a storage scandal in Qingdao port last year, banks and merchants have had to find new ways to keep track of the millions of tonnes of metal they are financing on behalf of customers outside of the exchange.

In the fraud that surfaced last June, a private metals trading firm, Decheng Mining, allegedly duplicated warehouse certificates stored at Qingdao to pledge a metal cargo multiple times as collateral for bank loans. The scam is estimated to have stung Western banks such as Citigroup Inc and Standard Chartered Plc, trading houses like Mercuria, and local banks for more than $3 billion.

Chamberlain said the idea arose when banks involved in commodity finance requested a way to "take that idea of an electronic commodities depository and extend it to other types of material."

Millions of tonnes of aluminum are stored in off-exchange warehouses, and materials such as bauxite and alumina, which are crucial to the aluminum supply chain, are not tenderable against LME contracts.

"The LME realizes that it's an exchange at the center of a much broader (over-the-counter) market," Chamberlain said.