Sumitomo copper, 1996

One trader, a grip on world copper, and ten years of hidden losses

Sumitomo Corporation’s chief copper trader was among the most powerful participants in the world copper market for a decade, holding large positions in London Metal Exchange futures and physical metal. He was also concealing losses, through unauthorised trades and off-book accounts, that had begun in the 1980s. When the trading was exposed in June 1996 the company disclosed a loss that grew to about $2.6bn, copper prices fell sharply, and the London Metal Exchange began writing the rules on dominant positions it still uses.

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What the lesson covers

1. What happened
2. The position
3. Why it broke
4. What it cost
5. What it teaches

Key terms

• Dominant position — A holding of futures and deliverable stock large enough to influence the price and spreads of a market.
• Backwardation — Nearby prices above later ones, often a sign that deliverable supply is scarce.
• Squeeze — Holders of short positions forced to buy or pay to roll because deliverable supply is controlled by others.
• Off-book account — A trading account kept outside the firm’s official records, where losses can be hidden.
• Lending rule — An exchange requirement that a dominant holder lend metal to the market at a capped premium.
• Key-person risk — Dependence on one individual whose absence, error or misconduct the organisation cannot absorb.

Every key term, A to Z

In practice

Physical commodity desks now enforce mandatory leave and desk rotation, reconcile broker statements independently of the trader, and monitor their share of exchange stocks and open interest. Exchanges publish positions by holder band, enforce position limits and accountability levels, and apply lending rules to dominant holders.

Read next

• Commodity Forward — Agree a price today for delivery later
• The LME nickel squeeze, 2022 — A hedge that could not be delivered into
• Barings, 1995 — One trader, both sides of his own desk

In the app, Sumitomo copper, 1996 carries a five-step lesson, a worked example and a bank of twelve questions drawn differently every sitting.

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