DELISTING OF WAREHOUSE COMPANY WWS - UPDATE

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1 To: All Members Ref: 18/208 Classification: Warehousing Date: 8 August 2018 Subject: DELISTING OF WAREHOUSE COMPANY WWS - UPDATE Summary 1. Further to Notice 18/171 dated 21 June 2018, this Notice provides an update following the delisting of Worldwide Warehouse Solutions LLC, Worldwide Warehouse Solutions UK Ltd and Worldwide Warehouse Solutions Singapore Pte Ltd (together WWS ). Background 2. During the course of June 2018, the LME became aware of potential concerns in the market around the financial stability of WWS. The LME must, in approaching situations such as the one that arose in respect of WWS, balance the following considerations: (i) protecting LME warrantholders from the potential impact of a warehouse insolvency; and (ii) not causing, by virtue of an LME action (such as delisting of a warehouse), further financial stress to a still-solvent business. The LME therefore closely monitored the situation in respect of WWS, with a view to taking such precautions as were necessary to mitigate the impact on the warrantholder. 3. During this period, the LME worked with WWS (which, at the time, was not the subject of any formal insolvency procedure) to voluntarily close its warehouses and transfer metal into the custody of other warehouses at the same location. In this way, the LME sought to mitigate the impact of WWS financial difficulty prior to any insolvency, and prevent inconvenience to metal owners as a result. Specifically, as reported in the Notice, the LME successfully transferred all metal held in WWS Singapore to an alternative operator. 4. However, later in June 2018, the LME learnt that landlord warehouse companies of WWS had refused to release LME-warranted metal because of debts owed to them. On the basis of this information, on 21 June 2018, the LME took the decision to delist WWS on a permanent basis and terminate the Warehouse Agreement between LME and each WWS affiliate. Concurrently, the LME s Special Committee decided that warrants issued in respect of remaining metal held at WWS warehouses in its remaining locations of New Orleans, St Louis, Antwerp, and Vlissingen should be suspended as good delivery against LME contracts. 5. The number of warrants that remained at the four locations at the time of delisting were as follows: THE LONDON METAL EXCHANGE 10 Finsbury Square, London EC2A 1AJ Tel +44 (0) Registered in England no Registered office as above. LME.COM

2 New Orleans 92 live and 8 cancelled Vlissingen 2 live Antwerp 59 live St Louis 1 live and 33 cancelled Current situation 6. Since 21 June 2018, the LME has been working with all interested parties either to enable the metal to be delivered out from the relevant warehouses, or to be placed in the custody of other warehouse companies with new warrants issued in respect of such metal. In a number of cases, the LME intermediated between the relevant parties, and supplied background information about the LME warranting and ownership structure. The LME also engaged listed samplers and assayers to obtain new certificates of analysis for the underlying metal in order for the metal to be placed back on warrant. The LME would like to thank those warehouse companies and other parties who assisted in the smooth transfer of the metal. A more detailed update in relation to each location is set out below: 6.1. New Orleans All metal relating to the 8 cancelled warrants has now been delivered out from the New Orleans warehouse. All metal relating to the 92 previously-issued warrants has now been placed back on LME warrant with another LME listed warehouse company in the same location. No warrantholder has suffered any loss of metal and, so far as the LME is aware, no warrantholder has suffered any material financial loss associated with either reclaiming metal or having metal placed under alternative LME warrants with an alternative LME listed warehouse company Vlissingen All metal relating to the 2 previously-issued warrants has now been placed back on LME warrant with another LME listed warehouse company in the same location. No warrantholder has suffered any loss of metal and, so far as the LME is aware, no warrantholder has suffered any material financial loss associated with either reclaiming metal or having metal placed under alternative LME warrants with an alternative LME listed warehouse company Antwerp Metal relating to 2 previously-issued warrants has now been placed back on LME warrant with another LME listed warehouse company in the same location. Sampling and assaying work continues with regard to the remaining 57 warrants and arrangements have been made to place the metal back on LME warrant with another LME listed warehouse company upon completion of this work and receipt of the certificates of analysis. Provided that the sampling and assaying is concluded satisfactorily, no warrantholder will have suffered any loss of metal and, as far as the LME is aware, no warrantholder will have suffered any material financial loss associated with either reclaiming metal or having metal placed under alternative LME warrants with an alternative LME listed warehouse company. 2

3 6.4. St Louis All metal relating to the 33 cancelled warrants has now been delivered out from the St Louis warehouse. The metal relating to the one issued warrant remains at the warehouse. As it currently stands, the LME understands that the warrantholder is in discussion with the landlord to try to secure release of the metal and the LME will continue to co-ordinate with the metal owner as and when required in order for them to secure the release of the metal. 7. As noted above, the LME understands that WWS had arrangements with certain landlords whereby the metal was stored in sheds owned or operated by such landlords. Under these arrangements, the LME understands that WWS would pass a percentage of the rent and/or FOT charge it received in respect of LME-warranted metal to the landlords in return for their storage and/or delivery out of the metal. WWS has, in certain circumstances, failed to make payment to the landlords. In some cases (specifically, in respect of the St Louis warehouses), landlords sought to claim a right of retention over the metal pending payment of charges in relation to such metal, notwithstanding that the creation of such a right of retention is prohibited under clause of the warehouse agreement. In the case of certain WWS warranted-metal (again, specifically, that in St Louis), it meant that certain metal owners faced a choice of: (a) paying amounts which the landlords claimed were due to them from WWS in order to secure prompt release of the metal; or (b) pursuing an action against the landlords for release of the metal through the courts. In these cases, the LME understands that certain metal owners have generally elected to make payment to the landlords. The LME proposes some further measures below to mitigate against the risk of this situation arising again in future. 8. The LME fully understands the frustration of affected metal owners with regard to these issues. The insolvency of a warehouse is a highly unusual event. However, it has always been anticipated, within the context of the LME s warehousing structure and rules, that such an event could potentially occur. Rather, the LME has invested significant effort and resource in ensuring that the legal structure of the LME warrant provides protection for warrant holders in the event of a warehouse insolvency. Indeed, the LME has no reason to believe that had metal owners chosen to pursue the return of their metal through the courts this legal structure would have prevented the metal owners from obtaining custody of their metal, or that the metal would have formed part of the WWS insolvent estate. The LME of course recognises that pursuing a legal approach would have taken time but considers that the core value of the LME warrant is the assurance that a legal action can be appropriately pursued. All LME warrantholders are advised to ensure that they have properly reflected this in their risk and legal management processes and documentation. Next steps 9. In light of the WWS delisting, the LME has undertaken a review, and considered any lessons which can be learnt by the market from this highly unusual event. 10. Clearly, a key step is to address the fact that certain of WWS landlords exercised a right of retention over the metal. The LME has had sight of certain WWS lease arrangements which contained a right of retention of the metal for the landlord. This is in breach of clause of the warehouse agreement, which states as follows: 3

4 A Warehouse may have a right of retention in respect of metal under Warrant for unpaid rent in respect of the metal and other charges owed by the current holder of the Warrant but not otherwise and, in particular, without limitation, no person may have any right of retention in respect of charges owed by any other person. 11. For the avoidance of doubt, the LME does not believe that the legal structure of the LME warrant (and, consequently, the ability of a warrantholder to pursue the return of its metal through the courts) is adversely impacted by the purported creation of a right of retention in a lease agreement. However, valid or not, the presence of such a clause may act to embolden a landlord to attempt to retain metal, and hence increase the chances that a warrantholder would then need to resort to legal action. 12. The LME understands that warehouse companies may have leased warehousing space from landlords, and may have other agreements in place with service providers for the provision of services to the warehouse company. The LME does not seek to prevent such arrangements. However, it is imperative that all agreements with such landlords and service providers make clear that such landlords and service providers may not have any right of retention or lien over LME metal, including, without limitation, in the event of non-payment by the warehouse company or any event which may give rise to termination of the agreement. In other words, the smooth and orderly operation of the LME s physical delivery arrangements must not be impeded by any arrangements which the warehouse company puts in place with its landlords or service providers or other third parties. 13. The LME has therefore instructed warehouse companies to check all agreements with third parties such as landlords and service providers to ensure that its agreements do not contain any such rights of retention or lien over LME metal. For the avoidance of any doubt, it is suggested that all such agreements contain an explicit provision confirming that the third party may not have a right of retention / lien over the metal in any circumstance. 14. Warehouses have been asked to confirm, by not later than 1 October 2018, to the LME in writing that all its agreements with third parties are in compliance with the requirements of clause of the warehouse agreement. In the event that any agreements are not currently in compliance, they will need to be amended by this date. Failure to do so may give rise to disciplinary action and / or termination of the warehouse agreement. 15. Furthermore, the LME intends to review its capital adequacy requirements for listed warehouse companies. However, the LME notes that an increase of capital adequacy for listed warehouse companies may in itself not necessarily prevent an insolvency situation. Furthermore, the capital adequacy requirements have to be balanced against the need to ensure competitiveness in the provision of warehousing services and not to deter companies from becoming listed warehouses. 16. Finally, the LME is also looking at further credit-worthiness checks of warehouse companies at listing and on a periodic basis. It will also examine measures for an early warning system to be put in place to ascertain whether a warehouse company is in 4

5 financial difficulties and what measures can be taken to ensure all metal on LME warrant is released prior to that company ceasing operations. Matthew Chamberlain Chief Executive Officer cc: Board directors Warehousing Committee 5