When the news hit in mid-1996 that a rogue copper trader at Sumitomo Corp. had racked up huge losses, the London Metal Exchange took heat for failing to detect the fraud sooner.
One of the central figures in that London firestorm, in a visit to Chicago last week, passed along lessons he learned while sorting out a fraud that cost the Japanese company $2.6 billion.
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For one, exchanges trying to monitor trading positions in their contracts need extensive information on over-the-counter market activity, said the exchange chief executive, David King.
In the Sumitomo case, trader Yasuo Hamanaka built up massive positions in cash markets outside the exchange, using brokers who weren’t exchange members. “It was apparent that things were happening out of our reach,” King said.
Another lesson: Don’t skimp on regulatory and compliance staff, which numbered a mere half-dozen at the London exchange when the crisis hit.
“Having made a virtue of being lean and mean, (when) the world’s biggest fraud is presented at the doorstep, inevitably one can’t cover all the bases,” King said.
King’s compliance staff will triple by year’s end under newly appointed executive director Alan Whiting, formerly a top government regulator.
Whiting’s appointment to a senior post also is meant to reassure market participants that confidential data they submit to the exchange won’t be leaked to competitors.
The biggest lesson: Have no doubt that manipulation will occur. “You can manipulate the market,” Whiting noted. “We’re determined to make it far more difficult, and discover (it) rather sooner.”
So having taken these lessons to heart, is the London Metal Exchange up to U.S. standards?
Its rivals at the New York Mercantile Exchange, which also trades copper, aren’t so sure. Said a spokeswoman: “It’s taken steps in the right direction, but we would like to see even closer parallels to the way our markets operate.”
Common sense: Last week’s big push by the Futures Industry Association for common clearing in Chicago petered out with no deal.
The trade group’s January deadline for action on the much-talked-about proposal has been pushed back to mid-March, when the industry gathers in Boca Raton, Fla., for its annual confab, said John Damgard, the association’s president. “There will be a deal by Boca,” he vowed.
Damgard claims the industry could save millions of dollars if the Chicago futures exchanges would merge their separate clearinghouses, which guarantee trades and enforce capital requirements.
While exchange brass say they like the idea in principle, no one has publicly committed to Damgard’s timetable. “The devil is in the details,” said Chicago Board of Trade Chairman Patrick Arbor.
Last week, Arbor appointed a new common-clearing task force, charged with revisiting governance issues that had been tentatively resolved in November.
The main concern–that big firms would gain too much power at the expense of small ones–is nothing new. Neither is the slow pace of negotiations.
Numbers guy: Public humility, a scarce commodity in the futures industry, appears to be a hallmark of M. Scott Gordon, newly elected chairman of the Chicago Mercantile Exchange.
Reporters, noting that Gordon had graduated from Union College in New York with a degree in mathematics, elicited a laugh from the Merc’s new chief last week by asking if he were a math whiz.
“I was not a math whiz,” Gordon emphasized. “I picked math as a major because you didn’t have to write essays.”
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