Today is a special day for the world's copper market. It's known as a Prime date settlement day. It's when tens of millions of pounds worth of copper futures contracts move to within three months of their expiry date and settlements on these contracts must thereafter be done on a cash basis only. Last week's revelation by the giant Sumitomo Corporation that its chief copper trader amassed losses of £1.2 billion was followed by surprisingly calm copper trading; clearly the global move to support the market succeeded. But today's Prime date will test whether the market is robust enough.
Later this week, a team of investigators from London's Securities and Investments Board (SIB), the principle city regulator, will arrive in Japan to pursue its inquiries. Japan is where Sumitomo has its headquarters and where the trader, Mr Yasuo Hamanaka, managed to lose (or so we are told) the equivalent of half a million pounds a day, every day, for the last ten years. And no one else knew (or so we are told). The SIB team doesn't need to travel to Japan to realise that in a land where honour and corporate pride run strong it is felt that stringent financial controls are unnecessary. The Sumitomo debacle follows fast on the "unauthorised losses" of £800 million by a Daiwa Bank dealer. The Japanese financial services industry would want to bolt on some serious internal controls - and quickly - if it wants to retain the confidence of its clients.
The SIB team also needs to recognise that the London Metal Exchange (LME) has much to answer for. It is the largest non ferrous metal exchange in the world; - to a large extent it is self regulating like Lloyds of London - and it shows. The LME was warned in 1991 and again in 1994 that Mr Hamanaka was up to no good. A London dealer, Mr David Threlkeld, told the LME that he had been asked by Mr Hamanaka to confirm trades which never existed and to backdate them to the previous year. The LME reaction was less than decisive. The LME says that when the full story is known it will be vindicated but the market doesn't think so.
The trouble with all metal trading is that so much of it takes place off market or over the counter and is therefore subject to no regulation at all. London allows a lot of markets to deal extensively over the counter, in equities in particular. This happens by design, not by accident. The Lord Mayor of London boasted last week that the city's lack of regulation encouraged business. It encourages more than business.
The inquiry should clear up how the copper market could have been in turmoil for weeks with most pointing the finger at Mr Hamanaka and yet nothing happened. It also should ascertain who else was in on the act; it is simply not credible that Mr Hamanaka acted alone for eight of the ten years as Sumitomo says. Unlike Nick Leeson, Mr Hamanaka was not his own book keeper nor did he work in a far flung outpost. More than anything the inquiry must establish exactly who lost and how much. Mr Hamanaka is said to have lost $140 million in one three month trading period. In the same period, the brokers he used, Winchester Commodities in London, earned a profit of $104 million on its Sumitomo dealings. There are more than a few threads to be unravelled.