INFLATION:


    of cheap imported consumer goods. This allowed  a near continuous run of consumer spending. As the world’s factory, China also became the number one importer of industrial commodities, diverting long  





The idea that a small (<5%) commodity holding could hedge an equity portfolio was open to question. Financial investors soon realised that a booming economy usually meant strong equities and strong   


ROLL GAIN?:  developed a wide range of customer hedging tools. With large balance sheets and strong credit ratings,       LME products, with NASAAC introduced by US car companies to address FASB133 hedge accounting rules.


Long dated hedge trades could generate massive MTM exposures, attracting capital adequacy provisions (BIS capital adequacy was revised a number of times), with increasing credit charges applied to forward hedge transactions. These long dated trades had already gone out of vogue by the time the LME’s clearing house (LME Clear) increased margins, 


 Asian options which were used heavily in the Cu rally of 1994-96 and later blamed as a contributing factor to the 1996 price collapse by an exchange with no visibility of OTC positions. The LME launched TAPOS  


 of LMEX) and structured products including rate enhancing CCOs, similar to the debt CDOs purchased 


BANKS AND LME WAREHOUSING:     


The scheme used a relatively slow LME warehouse out-rate to build exit queues at two warehouses in the US and Europe. With new metal held behind the queue, the warehouse had a guaranteed rental income which  and this incentive became a proxy for the global aluminium premium for physical sales.


  queues were the best bid for new metal, and physical premiums rose  and LME warehouse rule changes saw the unwinding of the warehouse 


   


 local controls on collateral management were less than strenuous, leading  by the Chinese authorities prevented contagion to Shanghai or elsewhere,  business thereafter.


  the number of LME Category 1 and 2 members has dropped to worrying  hedging and investment business.


Lower trading costs and revised margins could help ease pressure on   


 


Rohan Ziegelaar  


23 | ADMISI - The Ghost In The Machine | May/June 2019


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