The London Metal Exchange ("LME") has just announced proposals for a new layer of regulatory oversight in the form of "accountability levels". At first glance they look like position limits. But they don't actually limit the size of positions held.
And specifically they won't prohibit the sort of massive position that has just created another bout of turbulence in LME aluminium spreads. The timing of the LME's consultation exercise the week after JPMorgan was identified by sources as the beast of the aluminium market has unsurprisingly led many to link the two developments.
Particularly since the previous "mystery" dominant long has just left the stage having apparently reduced its position to a size that no longer appears in the LME's positioning reports.
However, this latest tweaking of LME compliance rules is all about an even bigger beast than the Wall Street heavyweight. It is Brussels that looms ever larger in the LME's thinking about how to preserve its unique trading structure, including the sort of mega positions taken by JPMorgan, in the face of a barrage of EU regulation.
JPMorgan's periodic squeezing of the front part of the LME aluminium curve has caused much wailing and gnashing of teeth in the market.
Many are profoundly unhappy that the exchange has tolerated a strategy that has resulted in anomalous technical tightness in a market characterised by massive inventory overhang.
And yet, as everyone concedes, the bank has not infringed any LME rules, which are predicated on not proscribing the sort of million-tonne-plus positions associated with JPMorgan's recent trading activity.
The exchange is, after all, a wholesale market populated by some of the world's biggest producers, users and financiers of metal. Limiting the size of positions players can trade doesn't remove their need to take such positions and there is a justifiable wariness of losing exchange business to the twilight world of over-the-counter ("OTC") trading.
What the LME already does is prevent a dominant long from abusing its position by limiting how much money it can make from lending metal to cash-date shorts.
What it also does already is query a long as to why it is doing what it is doing. Given the repeated nature of JPMorgan's raids on the aluminium spreads, it's a fair inference that there have been plenty of conversations between exchange and bank.
The LME already has the powers to force the reduction of a big position, if it deems it necessary.
Indeed, the exchange can do almost anything it sees fit if it means maintaining an orderly market.
The "Special Committee", a typically understated title for what is an all-powerful body, "may take such steps as in their absolute discretion they deem necessary to contain or rectify" any "undesirable situation or undesirable or improper trading practice which in their opinion has affected or is likely to affect the market." (LME Rule Book, Part 3, Regulation 15 (Emergencies))
Quite evidently, if the LME hasn't taken such action against JPMorgan, it is because it accepts the company's rationale for its trading behaviour.
All of which begs the question as to what more can be achieved with the new "accountability levels".
Simply put, these place an obligation on position holders of a certain size to explain what they are up to, formalising the current practice of one-to-one conversations that may take place around a dominant position.
By shifting the onus of information gathering to the customer of the exchange, the LME is aiming for "a more transparent reporting regime" for large positions. The proposed reporting thresholds say much about the size of positions associated with any specific LME contract.
So no surprise to see aluminium has the highest threshold of 15,000 lots or 375,000 tonnes. More surprising is that zinc has the second highest threshold of 8,000 lots, or 200,000 tonnes, while copper, a more active contract, has a threshold of just 5,000 lots, or 100,000 tonnes.
But that tells you something about who is likely to be holding the biggest positions in any one market. Aluminium and zinc are dominated by stocks financiers. Copper is not for the simple reason that there is not a lot of copper to finance, or at least not outside of China.
The thresholds will apply both to any single prompt date and to the full LME curve.
They are likely to have been back-tested to generate the most useful amount of information from a compliance perspective, but the LME "reserves the right to amend these levels".
The Beast of Compliance
Although the timing of this latest exchange move appears extraordinarily coincidental given the media exposure of JPMorgan, it is almost certainly aimed in a different direction.
A raft of European regulation is on its way, albeit around one year late in the case of the MIFID II, or to give it its full name, the Markets in Financial Instruments Directive, New and Expanded Version.
But coming it is and core to Brussels's view of commodity markets is a belief in position limits, both for exchange trading and for physical market exposure.
That poses a clear and soon-to-be-present danger for a market such as the London Metal Exchange with its tolerance of large positions.
The new "accountability levels" look to be part of a strategy of preparing the ground for some sort of compromise deal with Brussels.
Such a deal was explicitly discussed at the LME's regulation seminar last October which brought together representatives of the Commission, the Bank of England and British regulator the Financial Conduct Authority. In other words, all the interested parties in negotiating some sort of partial carve-out for the LME from MIFID II.
At stake is whether the LME can remain the wholesale market for global metals trading. As the LME itself expressed it in a white paper on "European regulatory change", if the approaching regulation is not "tailored" to reflect a market such as the LME, "it could risk irreparable damage to the wider industry, leading to a reduction in market participants, a trading shift to non-EU venues and reduced liquidity."
So rather than addressing JPMorgan's bullying of the aluminium spreads, these "accountability levels" may best be seen as a way to persuade Brussels that JPMorgan should be allowed to take the sort of mega position associated with that behaviour.
And if that seems unnatural and wrong, consider whether you'd rather watch them do it in the open marketplace of exchange trading under continuous regulatory scrutiny or feel the unexpected and invisible consequences of them doing it in the OTC shadows.