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London Metal Exchange Approves New Regulations Aimed at Reducing Bottlenecks in Warehouses

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The London Metal Exchange (LME) decided on new regulations this past Thursday, Nov. 7, aimed at addressing bottlenecks of metals in its warehouses. According to The Wall Street Journal, these bottlenecks are usually caused when warehouses reserve metals for traders and bankers, which are using it to raise working capital. The situation has become particularly severe during the worldwide economic recession, and the LME has received many complaints from buyers who need this metal for a variety of uses, such as manufacturing soda cans to window frames.

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The U.S. Justice Department and the Commodity Futures Trading have also gotten involved to try to break up the bottlenecks. Previously, the LME had considered putting regulations into effect that would require any of its warehouses with delays of more than 100 days to begin shipping out more metal than they took in. The arrangement made Thursday requires this to happen when outgoing delays reach 50 days. This regulation goes into effect in April 2014.

The announcement pleased metal consumers, but did not sit well with the metal producers and warehouses. It should lower the premiums paid by consumers needing quick access to metals tied up in warehouses, but it could shift much of the metal financing activity outside LME warehouses, where there is less transparency and quality control.

The new regulations also offer a greater level of transparency of the warehouses’ activities, including a full external review every six months and the establishment of a Physical Market Committee, which would give better representation of the physical metals market within the warehouses.

Another aspect of the new LME regulations is restrictions on how much in incentives the warehouse companies are allowed to pay to attract metal into their warehouses. According to feedback given to The Wall Street Journal, consumers of metals are getting more than they expected out of the new regulations, while producers and warehouses feel the measures go way too far. [/show_to]

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