By Josephine Mason and Luc Cohen
NEW YORK (Reuters) - The London Metal Exchange is considering whether its electronic LMESword system could be used to oversee metal stored outside the exchange, an executive said on Tuesday, the latest sign that a financing fraud in China was still roiling banks and trading.
The world's oldest and biggest metals market has received requests from several banks that finance big tonnages of metal to look into expanding LMESword, which proves the origin and title to LME-warranted metal, beyond exchange stock, Matt Chamberlain, LME head of business development, said in an interview.
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.
"We have been asked several times to look at whether Sword could be used to provide certainty over ownership over more than LME metal," Chamberlain said.
He would not say when the exchange may announce a possible move, but said it is a need for the market "right now".
In a scandal 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 Citi (N:C) and Standard Chartered (L:STAN), trading houses like Mercuria, and local banks for more than $3 billion.
The review comes as the exchange pushes to expand its vast warehousing network into China, the world's top metals consumer, as the Hong Kong Exchanges and Clearing Ltd (HKEx) aims to boost LME revenue following its takeover in 2012.
Under Sword, warrants are held in a central depository, are produced to a standard format and include a unique barcode.
NEW CONTRACTS, NEW LIQUIDITY
The exchange also has continued to overhaul its warehousing policy as a controversy drags into its sixth year. The exchange also aims to grow volume through new contracts, including steel scrap and rebar, fee discounts and tweaks to contracts to appeal to financial investors.
Head of sales Paul MacGregor said the exchange has applied to regulators for approval to introduce its fisrt-ever discounts for trading big volumes of two popular products: three-month contracts and those that expire on one date each month: its "Third Wednesday" contracts in aluminium, zinc and copper.
On March 16, the exchange will lift the order-to-trade ratio on the Third Wednesday each month, he said.