The U.S. commodities market regulator has put Wall Street banks and other big traders on notice for a possible investigation of their metals warehousing businesses following years of complaints about inflated prices.
The Commodity Futures Trading Commission last week sent a letter to firms ordering them to preserve emails, documents and instant messages from the past three years, two sources who received the letters told Reuters.
The notice amounted to a "warning shot" ahead of what is probably a formal CFTC probe, one of the sources said.
If there is an investigation, it would be the first such probe by any regulator into the lucrative and controversial industry, which since 2010 has become dominated by banks including Goldman Sachs and JPMorgan Chase and global merchant traders like Glencore, Xstrata and Trafigura.
The letter from the CFTC's enforcement division did not refer to an investigation, but the do-not-destroy order touched on some of the most sensitive issues in a controversy that has plagued the London Metal Exchange (LME) for years.
The CFTC explicitly said the firms should retain communication related to incentives or premiums given to metal producers in exchange for storing metal; daily loading rates; high load-out requests; delivery policies and procedures and complaints about load out requests.
At least two companies involved in warehousing received the letter, but sources said they believe such notices were sent to all the major players.
While the recipients of the letter say they now expect a wide-ranging probe, it is not clear how or when that could take place. The CFTC opens dozens of investigations a year, yet only a handful ever result in action and some are never made public. It almost never discusses open inquiries.
In the past three years, a mountain of aluminum and other metals has accumulated in the global warehouses that are part of the LME network, clogging the trading system and causing lengthy queues—up to a year—as consumers and dealers of the metal seek to get their hands on it.
The waits have caused the price premium on some metals to surge, prompting accusations that banks and traders are artificially inflating prices and distorting supplies.
After years of complaints from end-users such as Novelis, the world's biggest maker of flat-rolled aluminum, and customers like Coca-Cola, which use the metal for aluminum cans, regulators are now taking a deeper look into the industry as political pressure to rein in Wall Street's powers intensify.
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In an email to Reuters on Saturday, Bart Chilton, a Democrat on the five-person commission and frequent critic of lax regulation, urged a "full and comprehensive review" of warehouse ownership, but did not comment on the letter itself.
"These markets are too important to allow behind-the-scenes machinations to distort commodity prices," he said.
A possible probe comes amid intensifying scrutiny of Wall Street's role in raw material markets from owning oil tankers, power plants and metals warehousing.
The Federal Reserve is weighing whether to allow banks to continue owning physical assets.
"The CFTC has a role to play in protecting American manufacturers and consumers from having the price of their gas, canned food and beverages, or electricity driven up by Wall Street speculators," said Sen. Sherrod Brown, a Democrat from Ohio.
"The CFTC should use the full force of its power to address this abuse."
The Senate banking committee will hold its first hearing on the matter on Tuesday, asking whether "Too Big to Fail" banks should be allowed to operate freely in loosely regulated physical commodity markets and own physical commodity assets from power plants to oil tankers.
CFTC spokesman Steven Adamske declined to comment.
Goldman Sachs, JPMorgan and Glencore declined to comment. Trafigura declined to make and any immediate comment. The LME declined to comment.
The European Commission spokesman for competition policy, Antoine Colombani, declined to comment on the CFTC's move or whether the European Union antitrust authority was cooperating with the CFTC.
However, a source with knowledge of the matter said the commission spoke to the LME in connection with the warehousing issue during the Glencore-Xstrata merger in November last year and concluded there was no obvious way to intervene.
Goldman has consistently said Metro International Trade Services, its warehousing unit, has not broken any laws or rules.