Financial Services and Markets Appendices to the Minutes of Evidence


Note by the London Metal Exchange on the statutory immunity for Recognised Investment Exchanges and clearing houses for their regulatory functions


  The draft Bill largely continues the current regulatory regime for investment exchanges and clearing houses whereby Recognised Investment Exchanges (RIEs) have regulatory duties derived from statute, to maintain fair and proper markets. The RIEs are the front-line regulators against market manipulation and other abuse.

  The LME fully supports this regime. Market abuse can be effectively deterred only by the exchanges. The FSA is, necessarily, too distant from the markets to act to deter manipulation and to stop it in its tracks. The FSA can act after the event and discipline those found to have manipulated the market: but by then substantial damage could have been inflicted on the market, market participants and market users.

  The LME is determined to carry out its regulatory responsibilities. In doing so, however, it is subject to a substantial risk of litigation. The financial strength of the market participants and the financial stakes involved could threaten the commercial viability of the Exchange.

  The FSA enjoys statutory immunity for its regulatory actions taken in good faith. The LME's proposal is to limit immunity for RIEs and RCHs to regulatory actions taken in good faith to fulfil their statutory regulatory obligations under the new legislation. It would therefore do no more than treat consistently any given regulatory actions whether taken by an Exchange/Clearing House or the FSA.

  The draft Bill proposes limiting immunity to actions from the Exchange's members. This would substantially restrict the LME's capacity and effectiveness with which it is able to fulfil its regulatory functions. The danger of suit from customers of the Exchange, approved warehouses and employees of member firms (none of whom are members of the Exchange) is far greater than from our members.

  We understand that there may be some concern about giving commercial organisations statutory immunity or that immunity in these cases may remove civil rights. We believe these concerns to be misplaced. Under our proposal, immunity from civil suit would be heavily circumscribed. Exchanges would still be open to legal challenge that particular actions had been taken for commercial, not regulatory purposes or were taken in bad faith. Exchanges would still be subject to judicial review. Currently the LME is in the unique position of being subject to civil suit and judicial review for the same regulatory action.

8 March 1999

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