8 Min Read
* JPMorgan paring large silver short position-report
* Says does not hold 90 pct of LME copper stock warrants
* Experts' opinions mixed on purpose of large holdings
* In spotlight as U.S. moves ahead on tougher regulations (Recasts, adds more expert comment)
By Frank Tang
NEW YORK, Dec 14 (Reuters) - JPMorgan's (JPM.N) commodity business was uncomfortably in the spotlight on both sides of the Atlantic on Tuesday after reports that it had amassed a larger long position in copper and was unwinding a big silver short.
The reports placed the bank in the public eye as U.S. and European regulators are cracking down on commodity market concentration to prevent volatile price spikes, prompting debate about whether the positions reflect growing customer business at a top-tier commodity bank or aggressive trading.
JP Morgan is reducing a large position in U.S. silver futures, the Financial Times reported on Tuesday, citing a source familiar with the matter. Two months ago the bank and HSBC Holdings Plc (HSBA.L) were sued by investors who accused them of conspiring to drive down silver prices.
And in Europe, data from the London Metal Exchange showed that a single entity had increased its control over warehouse copper stocks and cash contracts to more than 90 percent, up from a 50-80 percent holding reported for the past several weeks. [ID:nLDE6BD136]
A spokesman for JPMorgan, which had been reported as holding the 50-80 percent position, denied that it held over 90 percent of stock warrants, but declined comment on whether it had a dominant position of less than that. [ID:nLDE6BD1U5]
Traders said both holdings could be tied to the bank's large customer and custodian business rather than traders building a big position with the bank's own capital, but a former regulator said the positions could raise eyebrows.
"I don't know whether JPMorgan has done anything wrong, but I would say this raises serious questions, and requires further investigation. It's quite unusual," said Michael Greenberger, law professor University of Maryland, former head of CFTC's trading and markets division.
"I suspect the CFTC's enforcement director may look into this to determine whether there has been any manipulation, even if there are no position limits to contend with," he said.
Others said it was almost unthinkable that any bank would risk regulators' ire so soon after the financial crisis, adding that it was probably a combination of many positions, possibly hedging on behalf of customers or physical inventories.
"I find it very hard to believe that JPMorgan would run afoul of authorities which would eventually find out if had committed any malfeasance," said Dennis Gartman, publisher of the Gartman Letter.
JPMorgan stores metal on behalf of the world's largest physically backed silver fund, the iShares Silver Trust (SLV).
"It's like asking a grain elevator if it has any short position in corn, when all it does is hedging against its long position in its grain storage," Gartman said.
A JPMorgan spokeswoman in New York declined immediate comment when contacted by Reuters.
The company's silver futures positions would be "materially smaller" in the future, the FT reported the source as saying.
U.S. silver futures barely moved on the news, with the benchmark March silver contract SIH1 settled up 0.6 percent at $29.788 an ounce on the COMEX division of NYMEX on Tuesday.
Graphic on silver prices and open interest:
Reuters Insider-JPMorgan trading in the silver and copper
FT story: link.reuters.com/pyw89q
Factbox on U.S. exchange-set metals position limits
JP Morgan's commodities business, led by Blythe Masters, joined the top tier commodity traders Goldman Sachs (GS.N) and Morgan Stanley (MS.N) this year with the acquisition of the RBS-Sempra operation, a global commodities powerhouse.
In October, JPMorgan and HSBC were hit with two lawsuits accusing them of driving down silver prices from the first half of 2008 by amassing huge silver shorts that are designed to profit when prices fall. [ID:nN27259071]
If they have been selling futures without an offsetting hedge since 2008, the banks would have missed out on the biggest silver rally since the Hunt Brothers attempted to corner the market 30 years ago.
Open interest in U.S. silver futures SIc1 has declined by nearly 20 percent since November, while prices have surged to 30-year peaks, trends that market analysts say suggest that short covering has helped fuel the gains. Prior to November, however, open interest had risen, suggesting bullish longs.
But the COMEX futures market is still relatively small compared to global supply. Exchange data showed total turnover equivalent to 540 million ounces, while global production is about 900 million ounces; the oil market, by comparison, trades 8 times more than the global supply.
"Just because they are all trading through JPMorgan doesn't mean that the bank is the decision maker and has a controlling position. It's different than proprietary trading," said Jeffrey Williams, who wrote a book about the Hunt brothers silver manipulation lawsuit and was called an expert witness in that case.
The revelations come just two days before the U.S. Commodity Futures Trading Commission is set to propose position limits for U.S. swaps and futures contracts, rules that would prohibit any single company from holding more than a pre-set share of any given commodity derivative.
But most commodity exchanges already have so-called "accountability limits" that they use to prevent any trader from accumulating an overly large position.
A spokesman for the CME Group (CME.O), which owns the COMEX market where U.S. silver futures are traded and sets and enforces its own position limits, did not return requests for comment.
According to CME Group's NYMEX rule book, which also regulates its COMEX metals division, the exchange set both its all-month accountability as well as any one-month accountability levels at 6,000 contracts, with the expiration-month limit at 3,000 lots.
CME NYMEX rule book: link.reuters.com/pah22r
Market participants, including commercial banks and trading houses, rarely exceed exchange position limits because of the cash margin requirements for large positions. Exchanges do not reveal customer names when position limits are hit.
Allegations of malfeasance in the relatively small, niche silver market predate the latest drive to clamp down on commodity markets and stem from persistent complaints from smaller players that prices are under the sway of big banks.
The CFTC began probing allegations of silver price manipulation in September 2008, but the paper said in two previous reviews of the silver market, the CFTC has dismissed claims of manipulation. (Reporting by Frank Tang, Joshua Schneyer in New York and Nicholas Trevethan in Singapore; Editing by Jonathan Leff and Alden Bentley)