WRAPUP 3-JPMorgan cuts silver short; copper holding eyed

Tue Dec 14, 2010 11:15pm GMT

 * 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: Quote) 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
 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: Quote) 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: Quote).
 "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
 markets: link.reuters.com/hym89q
 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: Quote) and
Morgan Stanley (MS.N: Quote) 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: Quote), 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
 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)

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