By Eric Onstad and Melanie Burton
LONDON/MELBOURNE (Reuters) - The London Metal Exchange is trying revamp its digital metal storage system LMEshield, which registers material stored in non-exchange warehouses to guard against fraud, after scant uptake since it was launched over a year ago.
The LME has been holding meetings with several major players in the industry, the latest in Singapore on Tuesday, proposing to place its digital storage system at the heart of a new set of self-imposed regulations.
"For LMEshield to work as a value proposition and the only way it can get the scale to be meaningful, is for the entire industry to buy in," James Proudlock, head of market development for the LME, told Reuters.
The LME, the world's oldest and largest market for industrial metals, declined to give volume data for LMEshield due to confidentiality.
But industry sources said LMEshield has seen limited business since it was launched in April last year to offer a secure electronic system for millions of tonnes of metal outside the LME's own network of registered warehouses.
However, another major fraud involving metals warehouses that shook up the industry this year has fuelled fresh interest in such a scheme, they added.
Banks ANZ (AX:ANZ) of Australia and Natixis (PA:CNAT) of France, broker Marex Spectron and commodity group Glencore (L:GLEN) are all embroiled in lawsuits over lost nickel amounting to a total of around $330 million.
LMEshield is another example of investment the LME has poured into new projects which have so far failed to return profits needed to justify the $2.2 billion the Hong Kong bourse (HK:0388) paid for the LME in 2012.
The weak volumes for LMEshield are partly due to the difficulty of moving from a paper-based system, especially in Asia, and the fact that it offers no legal recourse against fraud, the sources said.
"It's all about liquidity and a tipping point," said an executive with a warehouse company.
"If Party A is using the system, they can't trade if Party B is not using the system. It's a redundant system until market masses are using it."
FRESH INTEREST AFTER FRAUD
LMEshield was developed following a $3 billion fraud three years ago at China's Qingdao port in which a trading company allegedly duplicated warehouse certificates to pledge a cargo multiple times as collateral for bank loans.
Another warehouse fraud this year has sparked some new interest in LMEshield.
“Personally I am pushing for it. I think my own risk guys as well are increasingly concerned that you cannot just rely on the branding (of large LME-registered warehouses),” one banker in Asia said.
LMEshield, available in 68 warehouses, aims to provide similar security as the LME's existing LMEsword system, which provides the origin and title of metal delivered against LME futures or stored in LME-certified depots.
"We are trying to build consensus among all those industry constituents... for a common set of standards by which we mutually agree to be governed," Proudlock said.
"Those who stuck to those standards would be offered reasonably-priced insurance policies against fraud," he added.
Key to the success of LMEshield would be operating in mainland China, the biggest consumer of industrial metals, which has been off-limits to LME-registered warehouses.
The LME announced last October it would launch a one-year pilot for LMEshield in China with warehousing firm Henry Bath, majority owned by China's CMST Development (SS:600787).
The LME declined to give details of the progress of the pilot in China, but industry sources said no metal had been registered yet.
Proudlock said: "We are still in the early stages of the implementation of LMEshield in China and we are actively working extremely hard with partners and the broader industry to ensure that we gain alignment across warehousing and security standards in Asia."