In this issue

Introduction 2

Gulf States cut diplomatic ties with Qatar 3

Lightning strikes twice: the Access World fraud 4

Pinning down your cargo 6

Unlocking the supply chain 8

Market Manipulation and spot commodity contracts 12

Case digest 15

In the news 17

Edition 2 2017

Commodities in Focus

COMMODITIES IN FOCUS EDITION 2

2

Introduction

1

Editor, Jonathan Spearing

Welcome to the second edition of

Commodities in Focus (CIF). CIF is

Stephenson Harwood's bulletin for clients

engaged in the production, trading, carriage,

storage and financing of commodities.

Our aim is to provide insights into legal issues,

practical recommendations based on matters we

have handled, and recent developments in the

sector.

This issue has a particular focus on tech solutions.

My article on the Access World fraud highlights the

risks that can arise from an absence of technology.

In her article on the recent MSC v Glencore case,

Joanne Champkins reflects on the risks of deploying

technology without sufficient care and consideration.

Jonathan Kirsop looks at the potential applications

of Blockchain, the latest buzzword in technology, in

the commodities market.

We have also included a brief update on the

situation in Qatar and a detailed article from

regulatory partner, Richard Small, on the Market

Abuse Regulation.

We hope you find this bulletin both useful and

interesting. If you have comments or would like to

learn more on any topic please do get in touch:

E: jonathan.spearing@shlegal.com

T: +44 20 7809 2228

“Their business acumen and industry

knowledge are deep, and the strength of each team is impressive”

Chambers UK 2016

COMMODITIES IN FOCUS EDITION 2

3

Gulf States cut diplomatic ties with Qatar

By Edward Newitt

Between 5 and 6 June 2017, Saudi Arabia, UAE, Bahrain, Egypt, Yemen and the Maldives announced that they were cutting diplomatic ties with Qatar. Additional countries announced the cutting or downgrading of diplomatic ties (Jordan, Comoros, Chad, Senegal, Djibouti, and Mauritania) in the days thereafter.

Each country has different measures in place and

as a result it is prudent to check the latest/current

position if you are involved in business between

one of the embargo countries and Qatar. For

example, in recent days Egypt has withdrawn the

ability for Qatari visitors to obtain a visa on arrival.

However, the ten points below are issues that

should be considered by any trader operating in

the Middle East region.

1. Is the carrying vessel Qatari owned or

flagged, or flagged in a state which has

severed diplomatic ties?

2. Does the vessel have Qatari-origin cargo?

3. Has the vessel been ordered to call at a Qatari

port?

4. Where is the vessel planning to stem bunkers?

5. Are funds being received from Qatar through a

bank account held in a state which has

severed diplomatic ties?

6. Does your contract have an applicable force

majeure clause?

7. Does your contract have a widely drawn

sanctions clause?

8. Are you able to rely on the contract's liberty

clause?

9. Depending on the facts of the case, you may

need to consider whether the contract is

frustrated, or likely to become so?

10. As a final point, you and your employees

based in any of the jurisdictions imposing an

embargo should be mindful of legislation

which may apply if official government policies

are commented on in a disrespectful manner.

On a practical level, it should also be noted that

direct air travel between Qatar and Bahrain, Saudi

Arabia and the UAE is not possible. The airspace of

those countries has also been closed to Qatar

Airways and other Qatari registered aircraft.

Since Qatar imports some 80% of foodstuffs from

neighbouring Gulf Cooperation Council (GCC)

states, trade routes have had to be altered and

transhipment hubs have been moved from the

UAE to several other countries, in particular Oman.

Qatari flagged vessels are still permitted to transit

the Suez Canal, so the export of LNG to Europe

has not been affected.

Since the diplomatic impasse has continued it may

well be that additional measures, in particular

financial, will be implemented. However, this

aspect also needs to be seen in the context that

there are significant cross country investments

between Qatar and the other GCC countries.

If you have any concerns arising out of the above

issues, or other matters involving business

dealings with Qatar, you should seek legal advice

to ensure that you comply with the current

measures in force.

COMMODITIES IN FOCUS EDITION 2

4

Lightning strikes twice: the Access World fraud

With the Asian metals repo business again hitting the headlines for all the wrong reasons, Jonathan

Spearing looks at some of the ways banks and traders can mitigate their risk of exposure to warehouse

fraud.

When Access World, the Glencore-owned warehouse, reported in January this year that

evidence had been found of forged warehouse receipts circulating in the market, it

immediately raised the spectre of the Qingdao scandal in 2014.

In that case, the Chinese authorities uncovered a

longstanding conspiracy involving the use of

fraudulent receipts to obtain multiple lines of repo

finance either by selling non-existent metal or by

selling the same lots of metal to multiple

counterparties. All the indications are that

something similar has occurred with respect to

Access World.

This latest fraud appears more limited in size and

scope than Qingdao, where the overall losses are

believed to have amounted to billions of dollars. It

has nonetheless created significant financial

exposure and sent shockwaves through the

market.

The discovery of a second major fraud inside three

years is a reminder of the risks that arise from

using paper receipts to represent ownership and

the right to delivery of goods stored in

warehouses. Although these risks are not unique

to any particular commodity or sector of the

market, there appear to have been a confluence of

factors which have left the Asian metals repo

business particularly susceptible (but that is a

topic for another day).

A longer term solution may ultimately be found in

the use of blockchain technology (as discussed in

more detail in Jonathan Kirsop’s article,

'Unblocking the supply chain') but that may be

several years away.

In the meantime, there are a number of

considerations for those active in the repo

business to bear in mind.

Warehouse Due Diligence

Under English (and many other) conflicts of law

rules, the question of who actually owns, or has

the right to possess, particular goods is not

determined by the law governing the contract

between a seller and buyer of those goods.

Instead, it is determined by the law of the

jurisdiction in which these goods are situated

(known as the “lex situs”).

In the context of stored goods, therefore, it is of

vital importance to assess the status of the

warehouse under local law. A purchaser needs to

know that the warehouse has the legal capacity to

issue valid and binding receipts and to understand

what ownership and/or possessory rights are

conferred on the holder of such receipts.

Attornment

The default position under English law is that

warehouse receipts are not negotiable documents

of title. As such, the mere transfer of an endorsed

receipt from one party to another will not normally

be capable of transferring the right to possess the

underlying goods. That transfer can only take

place upon the warehouse “attorning” to the

transferee - i.e. acknowledging that it holds the

goods for the transferee.

“the mere transfer of an endorsed receipt …will not normally be capable of transferring the right to possess the underlying goods”

While the analysis is not the same in all

jurisdictions, it is always prudent for a purchaser

to obtain (or, better, require his seller to procure)

an attornment from the warehouse.

COMMODITIES IN FOCUS EDITION 2

5

Endorsement

Warehouse receipts are often treated as negotiable

documents of title, regardless of their actual legal

status. This is an approach that generates risk. It

is ultimately the practice of endorsing and

transferring receipts, often without the warehouse

being required to update its records for months or

years at a time, that creates the time and space

for forgeries to be made and fraud to be

committed.

Various risk mitigation steps can be taken but the

safest course of action is normally for a purchaser

to obtain (or, better, procure from its seller) an

attornment in the form of an expressly non-

negotiable warehouse receipt issued to its order.

“the safest course of action is normally for a purchaser to obtain (or, better, procure from its seller) an attornment in the form of an expressly non-negotiable warehouse receipt issued to its order”

Credit risk

Since repos are designed as self-liquidating

structures, finance providers sometimes view the

creditworthiness of their counterparties as

something of a secondary concern.

In cases of fraud, however, a finance provider may

not acquire any goods and may therefore be

unable to liquidate its position. In these cases, it

will be crucial to have a financially strong

counterparty against whom recoveries can be

made (e.g. by means of breach of title warranty

claims).

The risk of warehouse fraud may be low, but as

both Qingdao and Access World show, the

potential exposure is significant – particularly

when set against the thin margins typically

available for repos.

“The risk of warehouse fraud may be low, but as both Qingdao and Access World show, the potential exposure is significant – particularly when set against the thin margins typically available for repos”

Insurance

Those involved in the repo business commonly rely

on standard marine cargo policies with extensions

for warehoused goods. The important point to note

here is that such policies typically only cover

physical loss or damage. They will not normally

extend to financial loss (e.g. where a purchaser is

deceived into accepting a fake warehouse receipt

and is therefore cheated out of his money),

although such cover may be available for an

additional premium (and often with a relatively low

sub-limit).

When setting up repo deals, it is important to

understand properly how your insurance will

respond to instances of fraud.

Jonathan acted for Mercuria in their successful

Qingdao-related litigation against Citibank. He is

also currently advising on matters relating to the

Access World fraud.

Jonathan Spearing

Senior associate, London

T +44 20 7809 2228

E: jonathan.spearing@shlegal.com

COMMODITIES IN FOCUS EDITION 2

6

Pinning down your cargo

The presentation rule is a fundamental aspect of shipping law: a carrier of goods delivers the

goods on production of the bill of lading. In spite of this, attempts are constantly made to

circumvent it. The decision of the Court of Appeal in MSC Mediterranean Shipping Company

SA v Glencore International AG ([2017] EWCA Civ 365) is the latest example.

Background

Glencore shipped three containers of cobalt

briquettes to Antwerp. MSC was the carrier. After

discharge of the cargo at Antwerp, two of the

three containers went missing. Glencore was

holder of the bill of lading and owner of the goods.

It claimed damages against MSC for non-delivery

of the cargo. Andrew Smith J. found in favour of

Glencore, so MSC appealed.

The issues centred around the fact that when

Glencore, through their agent Steinweg, presented

the bill of lading to MSC, instead of the goods or a

delivery order, they were given pin codes which

would enable them to obtain delivery of the goods

from the MSC terminal within Antwerp port.

Glencore had made 69 similar shipments prior to

this one and each time the pin codes had been

used by Steinweg.

The bill of lading was a "To Order" bill which

provided that:

"one original Bill of Lading, duly endorsed must be

surrendered by the Merchant to the Carrier … in

exchange for the Goods or a Delivery Order".

Steinweg presented the bill to MSC and received a

Release Note containing the pin codes. When the

hauliers went to collect the containers, it was

discovered that two had already been delivered to

'unauthorised persons'.

The issues were:

1. Was delivery of the pin codes symbolic delivery

which amounted in law to delivery of the

goods?

2. Did MSC's provision of the pin codes constitute

provision of a delivery order within the meaning

of the bill of lading?

COMMODITIES IN FOCUS EDITION 2

7

3. Did MSC's provision of the pin codes constitute

provision of a ship's delivery order pursuant to

s. 1(4) COGSA 1992?

4. Were Glencore estopped from contending that

delivery of the cargo upon presentation of the

pin codes was a breach of contract and/or duty

because it had allowed pin codes to be used for

the 69 previous shipments?

Held (Court of Appeal):

1. Delivery of the pin codes was not symbolic

delivery which amounted in law to delivery of

the goods. The contract contemplated either

actual delivery against presentation of the bill,

or a delivery order. Delivery of a code could not

itself constitute delivery. Delivery usually

means actual delivery, not delivery of a means

of access. The bill of lading did not specify that

provision of the pin codes could amount to

delivery, nor that anything other than actual

delivery or a delivery order was acceptable.

2. MSC's provision of the pin codes did not

constitute provision of a delivery order within

the meaning of the bill of lading: the expression

'delivery order' can have many meanings but

under an English law contract it should have the

same meaning as a ship's delivery order as

defined under COGSA 1992. A delivery order is

provided by owners, in exchange for the bill of

lading, as an alternative to actual delivery and

in substitution for the bill. It should contain an

undertaking by the carrier to deliver the goods

to the person identified in the bill. A shipper

would not agree a term to surrender the bill of

lading without receiving the goods or the

benefit of a substitute undertaking in his favour

from the carrier. The Release Note did no more

than instruct the terminal to deliver against the

entry of the pin codes which it provided to

Steinweg. It did not contain the relevant

undertaking and therefore, did not satisfy the

obligation to produce a delivery note.

3. MSC's provision of the pin codes did not

constitute provision of a ship's delivery order

pursuant to s. 1(4) COGSA 1992. The Release

Note could not be treated as providing any

undertaking to deliver at all. At best, it

contained a promise to deliver to the first

presenter of the codes, but that was not the

undertaking required: namely to deliver to

Glencore/Steinweg. There was no authority or

custom to establish that the Release Note with

pin codes could count as a delivery order to

deliver to the first presenter of the codes.

Further, Glencore was unaware when the

contract was made that the electronic pin codes

system was in use; it cannot therefore be taken

to have agreed that delivery could be made to

the first presenter of the codes.

4. Glencore were not estopped from contending

that delivery of the cargo upon presentation of

the pin codes was a breach of contract because

the system had been used for 69 previous

shipments. It had limited knowledge of the use

of the system and gave no clear

representations along those lines. Steinweg was

Glencore's agent for collecting the cargo, but

not for the purpose of entering into the

contract. Further, the claim by Glencore was

not simply that delivery was made against pin

codes, but that delivery was not made at all.

Traders should therefore be aware of the

technology that is entering into the traditional

shipping processes, often without the

knowledge of the contracting parties. As such

methods become more prevalent, contracts

may be altered to ensure that consent is given

to their use.

As Sir Christopher Clarke said in his judgment:

"It may be that a system whereby delivery

against a pin code is valid, even if presented by

a thief, is sensible because of the benefits of

using modern technology in place of paper.

But, if that is to be done, it requires, in my

view, either appropriate contractual provision or

statutory imposition."

Given the potential compromise to security of

the cargo, until appropriate legislation is

introduced, consideration should be given to

consequential amendments to allocate liability

for any security lapses.

Joanne Champkins

Senior associate, London

T +44 20 7809 2623

E: joanne.champkins@shlegal.com

COMMODITIES IN FOCUS EDITION 2

8

Unblocking the supply chain

Distributed ledger technology – popularly known as blockchain – has the potential to become

a key part of the shipping and international trade industries due to the potential benefits of its

transparency and security. In this article Jonathan Kirsop looks at what blockchain is, how it

works and crucially, what are the risks?

In the commodities sector, transparency and proof

of authenticity is crucial to retain market

confidence in the goods being traded.

However, as title and/or the right to possess goods

is commonly still recorded on paper, the credibility

of the supply chain can be called into question due

to the risk of fraud.

A good example of such risk materialising is the

2014 scandal affecting the port of Qingdao in

China, where banks and traders were left facing

substantial losses following a longstanding

conspiracy involving the use of fraudulent receipts

to obtain multiple lines of repo finance, either by

selling non-existent metal or by selling the same

lots of metal to multiple counterparties. See:

Mercuria Energy Trading PTE Ltd v Citibank NA

[2015] EWHC 1481 (Comm) (22 May 2015).

What is Blockchain?

Blockchain is a term used to describe a ledger

that, rather than being a single ledger held in a

central location (like a bank), is a network of

multiple copies of the same ledger shared or

distributed amongst its members.

At any one time, each member holds an exact

copy of the current ledger. Whenever there is a

proposed update to the ledger, such as a new

transaction, this update is automatically broadcast

to each participant in the Blockchain network,

which validates the transaction based on its copy

of the ledger. Once the transaction has achieved a

majority consensus that it aligns with the majority

COMMODITIES IN FOCUS EDITION 2

9

of the participants' ledgers, it is timestamped and

recorded in these ledgers. This is what is known as

a block in the chain.

The combination of a de-centralised record and

majority consensus approach creates an

immutable record of transactions that is appealing

to many high-risk industries.

The uses for Blockchain have predominantly been

based around crypto currency and finance: Bitcoin

being the most obvious and recognised use of the

distributed ledger technology. The basis of such

use is the ability to conduct financial transactions

and currency trading without the middlemen of

banks or clearing houses.

With all members of the network having a copy of

the current version of the ledger, any digital

transaction that occurs is sent to all the ledgers in

the network to verify the transaction.

Therefore, if one party tried to sell currency to

another party in the network, but the majority of

ledgers in the network did not recognise that the

selling party had the currency to sell, the

transaction would not be approved and it would

not become a block on the ledger.

It is this transaction authenticity that is getting

people excited about the technology's wider

application.

“it is this transaction authenticity that is getting people excited about the technology's wider application”

How could it be applied to the commodities

market?

The supply chains in the various commodities

markets are often vast, with complicated deal

structures around, for example, inventory

financing which can often blur the lines of

ownership of goods.

As noted above, some of the paperwork (and it is

in fact paperwork) evidencing ownership can

create mistrust and a lack of transparency as to

the real owner of the goods. With each holder of a

paper-based receipt or centralised record of

ownership representing a single point of failure,

there is a greater risk of these records being

tampered with, lost or stolen.

Blockchain technology allows the goods to be

given a digital identity or "fingerprint", once it first

enters the supply chain. This fingerprint will

contain details of the goods. For instance, a

diamond's quality, weight, colour, cut and overall

grading together with the initial owner's details.

This fingerprint could then be added to a private

blockchain where the goods are traded. Each

member is given a copy of this private ledger and

therefore a level of transparency over the

transactions being conducted in relation to those

goods. The technology available can give real-time

transaction and ownership information about the

goods.

Smart contracts

An additional key benefit of Blockchain, which is

starting to develop, is the concept of "smart

contracts."

The term is slightly misleading, but it is essentially

code embedded within the blockchain to allow pre-

determined activities to occur on the trigger of

certain events. This automation could simplify

transactions to allow payment to the seller from

the buyer immediately upon the predetermined

rules having been met. The ledger would

automatically be updated rather than relying on a

manual process.

Risks

The technology underpinning Blockchain can offer

greater confidence when compared with a

centralised system. However, the technology is not

without risks, such as the following:

• Like many initiatives, the quality of the output

is dependent on the quality of the input.

Therefore, it is critical that the details of the

goods are accurately captured at inception.

• Blockchain technology is available to anybody

but it is relatively difficult to understand the

mechanics behind it. Due to the use of the

technology being in its infancy, illegitimate

parties may seek to legitimise fraudulent goods

by creating a private Blockchain network to

imply the authenticity of the goods.

• One of the biggest hurdles for Blockchain

gaining credibility in the commodities market is

the need for a critical mass of stakeholders.

While the original owner of the goods may wish

COMMODITIES IN FOCUS EDITION 2

10

to include it within a Blockchain ledger, the

parties wishing to transact with the goods must

also wish to participate.

• A key question for any electronic system is

whether it is vulnerable to hacking. The recent

MSC v Glencore case (see previous article) is a

good example of weaknesses in such systems.

Blockchain will need to ensure that it has the

best protections in place to maintain its

integrity.

Despite these risks, what is important to

remember is that Blockchain technology is merely

a toolbox offering a sophisticated database. This

means that it has the flexibility to record and

process transactions in the manner it is

programmed to do.

The biggest selling point of Blockchain is the

immutable record it can present to its participants,

which, in the commodities market, can help to

prove the provenance of the goods.

“the biggest selling point of Blockchain is the immutable record it can present to its participants, which, in the commodities market, can help to prove the provenance of the goods”

While the decentralised ledger presents fewer risks

than the centralised ledger, the difficulty over the

next few years will be persuading people that

change is good. It will take significant education to

convert people away from the paper-based manual

approach, with which they are familiar, to a peer-

to-peer automated approach.

As Marco Dunand, chief executive of Mercuria

reportedly said at Reuters Global Commodities

Summit 2016:

"For blockchain to work, you need sufficient

amount of participants to go for it…That is the only

element that is slowing down the development of

blockchain."1

1 ‘Mercuria sees oil sector going digital with blockchain’, 13 Oct 2016, Reuters: Reporting by Amanda Cooper; Editing by Susan Thomas: http://www.reuters.com/article/us-commodities-summit-mercuria-blockchai-idUSKCN12D1YN

Jonathan Kirsop

Partner, London

T + 44 20 7809 2121

E: jonathan.kirsop@shlegal.com

COMMODITIES IN FOCUS EDITION 2

11

SNAPSHOT

BLOCKCHAIN TECHNOLOGY IN THE COMMODITIES SECTOR

Agribusiness

• Bunge used an electronic letter of credit for a transaction involving a bulk cargo of soy beans.

• Louis Dreyfus (LDC) executed a trade to export orange juice from Brazil to Belgium using electronic

Bills of Lading.

Cotton trading

• LDC, Cargill and Olam are members of a blockchain consortium working on a supply chain and

trading system for the cotton industry using Hyperledger Fabric.

• Commonwealth Bank of Australia, Wells Fargo and Brighann Cotton pioneered a landmark blockchain

trade transaction involving a shipment of cotton from Texas, USA to Qingdao, China, using the

efficiencies of a distributed ledger – Skuchain’s Brackets system – for all parties.

Oil trading

• Mercuria completed a pilot oil trade earlier this year, working with ING and Societe Generale, in

which a "smart contract" letter of credit was set up on a blockchain while the traditional paper

process ran in parallel.

• Natixis, Trafigura Trading and IBM are collaborating to create a blockchain-based commodity trade

finance platform for US crude oil transactions.

• ING and Societe Generale have run a paperless oil trade on a blockchain platform.

• A group of global enterprises and startup blockchain innovators including BP, JP Morgan and

Microsoft have formed the Enterprise Ethereum Alliance (EEA) to track data and financial contracts.

In June, Clearmatics announced that it had joined the EEA.

Mining and metals

• Vale used electronic Delivery Orders for a series of iron ore trades to China.

Energy trading

• Blockchain Technology Limited (BTL), an enterprise technology platform provider announced in June

that it has taken steps towards a go-to production phase on its Interbit platform, following the

successful completion of its European energy trading pilot with BP, Eni Trading & Shipping and Wien

Energie.

Other

• GFT Technologies SE (GFT) launched its commodities consensus computing prototype for clients last

year. The app is part of GFT’s ongoing development project (Project Jupiter) that seeks to incubate

disruptive business ideas and prototype solutions around Blockchain technology - demonstrating how

it is possible to track physical commodities assets through the use of a distributed ledger-based

business model.

• At the 2017 ICC Banking Commission Annual Meeting in Jakarta, the Commission formally launched

its new Work Group on Digitization to (1) evaluate ICC rules and guidelines to ensure they are “e”

compliant; (2) conduct a legal review of enforceability of digital vs. paper bills of lading, that banks

use as security for trade finance transactions; and (3) develop a set of minimum standards to enable

digital connectivity, focused on legal, liability, information security and technology.

COMMODITIES IN FOCUS EDITION 2

12

Market Manipulation and spot commodity contracts

On 3 July 2016, the new European Market Abuse Regulation (MAR) came into force. Under

MAR, the market manipulation offence has been widened to capture both the manipulation of

commodity derivatives traded on exchange and related spot commodity contracts. The offence

also now has explicit extra-territorial applicability. In this article, Richard Small examines the

new offence and considers some of the practical implications for those in the commodities

markets.

Spot commodity contracts

MAR2 defines a spot commodity contract as:

"a contract for the supply of a commodity traded

on a spot market which is promptly delivered when

the transaction is settled, and a contract for the

supply of a commodity that is not a financial

instrument, including a physically settled forward

contract".3

2 REGULATION (EU) No 596/2014 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC. The text can be found here. 3 Article 3(1)(15), MAR.

It is important to note that the regime is designed

to capture spot commodity contracts only in so far

as they relate to financial instruments. MAR does

not seek to capture trading in spot commodity

markets that only affects the spot market.

COMMODITIES IN FOCUS EDITION 2

13

Market manipulation – the offences

In relation to spot commodity contracts, the

market manipulation offence can broadly be

divided into three types:

• entering into transactions or placing orders

which would give or would be likely to give a

false or misleading signal as to the supply of,

demand for or price of a related spot

commodity contract;

• any activity or behaviour which will likely affect

the price of a related spot commodity contract

and which employs a fictitious device or any

other form of deception or contrivance; and/or

• dissemination of information that gives or is

likely to give a false or misleading signal as to

the supply of, demand for or price of a related

spot commodity contract or that secures or is

likely to secure the price of such related spot

commodity contract at an abnormal or artificial

level, including dissemination of rumours where

the person making the dissemination knew or

ought to have known that the information was

false or misleading;

Equally, any attempt to commit one of the above

types of market manipulation is an offence.4

Manipulation of physical commodities, spot

commodity contracts and OTC contracts is not an

offence unless the contract is linked to a financial

instrument admitted to trading or traded on a

regulated market, multilateral trading facility or

organised trading facility.

In practice, it is hard to imagine a major base or

precious metal, energy or agricultural commodity

that is not linked to a financial instrument traded

on a regulated market.

4 Article 12, MAR.

“it is hard to imagine a major base or precious metal, energy or agricultural commodity that is not linked to a financial instrument

traded on a regulated market”

Does someone need to have an interest in a

commodity derivative traded in the UK for the FCA

to be able to bring an action against them? In

other words, do they need to be manipulating the

spot commodity contract with a view to making a

profit or avoiding a loss on a related financial

instrument? The answer is no.

For example, in 2010, the FSA imposed a

prohibition order and financial penalty on an oil

trader for creating a false and misleading

impression as to the supply, demand and price of

Brent Crude Futures and securing the price of

Brent at an abnormal and artificial level.5 In this

instance there was no suggestion that the trader in

question had in any way benefitted from his

trades; he had traded from home whilst drunk.

So although it is open to the FCA to take action

against a firm/individual, even where that

firm/individual does not have an interest in that

commodity derivative, in practice the FCA is likely

to focus its efforts on those who have

corresponding interests in a related commodity

derivative traded on exchange.

Extraterritorial applicability

The prohibition on market manipulation in relation

to spot commodity contracts applies to actions and

omissions both within the European Union and in a

third country.6 How this would be enforced in

relation to manipulation in the spot markets

remains to be seen.

The FCA has shown a willingness to pursue those

manipulating the commodities markets in the UK

from overseas before. For example, in 2013, the

FCA fined Michael Coscia, a US based high

5 FSA Final Notice, Steven Noel Perkins, 24 June 2010. The text can be found here. 6 Article 2(4), MAR.

COMMODITIES IN FOCUS EDITION 2

14

frequency trader, £597,993 for deliberate

manipulation of the oil commodities markets.7 Mr

Coscia had placed thousands of false orders for

Brent Crude and Western Texas Intermediate

futures from the US on the ICE Futures Europe

exchange in the UK.

It is therefore quite possible that an individual in,

say, Geneva could find themselves on the

receiving end of an FCA enforcement action in the

UK, if they had manipulated spot commodities to

influence the value of UK traded financial

instruments.

Penalties

The administrative penalties for a breach of the

market manipulation rules can be severe.

Individuals and firms can face:

• public censure;

• disgorgement of profits gained or losses

avoided as a result of the breach;

• a withdrawal or suspension of an investment

firm's authorisation; and

• fines of up to €5,000,000 for individuals and

€15,000,000 or 15% of total annual turnover

for legal persons.

Practical implications

In practice, this brings the EU market abuse

regime into line with the original market abuse

regime set out in the Financial Services and

Markets Act 2000 (FSMA 2000) which similarly

caught behaviour relating to commodities that

were the subject of financial instruments traded on

exchange in the UK.

As with the UK's previous market abuse regime,

one might be tempted to think of market

manipulation in terms of direct manipulation of the

price of the spot commodity contract, i.e., placing

a large volume of orders in an attempt to give a

false impression as to the price of the commodity.

This would however be a dangerous

mischaracterisation of the offence.

There are a number of other scenarios that the

FCA is likely to consider as an offence under the

market manipulation regime:

• making deliberately inaccurate statements as to

the level of a commodity being warehoused in

order to create a false impression of scarcity

thus leading to a price increase; and

• moving an empty cargo ship to create a false or

misleading impression as to the supply of or

7 FCA Final Notice, Michael Coscia, 3 July 2013. The text can be found here.

demand for, and therefore the price or value of

a commodity.8

Those actively engaged in the spot commodities

markets both in the UK and overseas should

therefore review their policies and procedures to

take into account this risk: this should not be

limited to market traders but should also include

those involved in the management of physical

commodities.

Firms should ensure that they have the correct

systems and controls in place to prevent market

abuse from occurring.

The impact of Brexit

The UK has historically been one of the driving

forces behind the ever tightening prohibition on

insider dealing and the various forms of market

abuse, including market manipulation. Indeed, the

original Market Abuse Directive was largely

predicated on the then existing UK market abuse

regime.

It is therefore hard to see that Brexit will lead to a

relaxation of the market abuse regime currently in

place in the UK.

Depending on the outcome of Brexit negotiations,

it is likely that the UK will either continue to

implement the EU's market abuse legislation as

part of a condition of continuing to have access to

the single market, or will voluntarily do so in the

hope of claiming third country equivalence under

MiFID II.

8 This was given as an example by the FCA of behaviour that would likely have satisfied the old test of being likely to give a "regular user" of the market a false or misleading impression, formerly an offence under s118(8), FSMA 2000.

Richard Small

Partner, London

T + 44 20 7809 2424

E: richard.small@shlegal.com

COMMODITIES IN FOCUS EDITION 2

15

Case Digest

LBI EHF (in winding up) v Raiffeisen

Zentralbank Osterreich and another [2017

EWHC 552 (Comm)

LBI had collapsed leaving a number of trades

outstanding with Raiffeisen. Raiffeisen allegedly sent

default notices to LBI by fax terminating the trades

but LBI said no such notices had been received.

The judge held that the default notices had been

served effectively by fax as permitted by the

agreement between the banks.

Further, the final valuations of the trades by

Raiffeisen met the requirement for a rational, honest

determination of fair market value as at the relevant

date.

Kyokuyo Co Ltd v AP Moller-Maersk AS, The

Maersk Tangier, [2017] EWHC 654

A cargo of large unpackaged pieces of tuna was

stuffed in three refrigerated containers and carried

onboard the Maersk Tangier. The contracts of

carriage contemplated the issue of bills of lading,

but waybills were issued instead, due to delays.

The judge held that the Hague-Visby Rules were

compulsorily applicable, notwithstanding that the

carrier had issued waybills rather than bills of

lading. The individual pieces of ‘tuna’ were ‘units’,

rather than the container counting as a 'package'.

Leave to appeal has been granted.

Sinocore v RBRG [2017] EWHC 251 (Comm)

Phillips J. held that a Chinese arbitral award was

enforceable in England under the New York

Convention, even though the claimants had

presented forged bills of lading to obtain payment

under a letter of credit.

The fact of the forgery had been considered by the

Chinese tribunal and, in any event, the award was

for damages for a distinct breach of the relevant

sale contract, not for payment against presentation

of the forged BLs. The fraudulent behaviour did not

taint the award.

Mena Energy DMCC v Hascol Petroleum Ltd

[2017] EWHC 262

Mena agreed to sell fuel oil and gas oil to Hascol.

There were issues with the specification of the

product and the oil was taken away, blended and

redelivered. Hascol refused to contribute to the

return voyage and also refused to open a letter of

credit to pay for a second cargo.

The judge held that Hascol were in breach of an

agreement to contribute to the return voyage and

the contract by not opening the letter of credit.

Vinnlustodin v Sea Tank Shipping (The

Aqasia) [2016] 2 Lloyd's Rep 510

Leave to appeal has been granted in this case which

concluded that under the Hague Rules, there is no

package limitation for bulk cargo.

COMMODITIES IN FOCUS EDITION 2

16

Deutsche Bank AG, London v Cimb Bank

Berhad [2017] EWHC 1264 (Comm)

A confirming bank under a letter of credit in relation

to the sale of cotton, sought payment after it had

paid the beneficiary. The issuing bank declined to

pay and put the confirming bank to strict proof of

payment. The obligation to pay only arose when

payment had been made and the issuing bank was

entitled to the information that was "strictly

necessary to understand the other party's case".

Payment could be made by set off, as the

confirming bank had done.

Gard Marine and Energy Limited v China

National Chartering Company Limited and

another [2017] UKSC 35

The Supreme Court held that Kashima was a safe

port, so charterers were not in breach of the safe

port warranty.

The relevant event was the combination of the long

waves and high winds, not the individual

constituents. That combination was an abnormal

occurrence: no vessel had ever suffered such an

event in the port's history, and the storm had

developed rapidly and was particularly severe.

The court also held obiter that the sub-charterers

could not limit their liability for the insurer's losses

and that insurers could not pursue a subrogated

claim against sub-charterers because owners and

demise charterer were joint insureds under the

policy and so no claim arose between them, to

which insurers could be subrogated.

Globalia Business Travel SAU of Spain v

Fulton Shipping Inc of Panama [2017] UKSC

43

Charterers under a long term time charter repudiated

the contract and redelivered the vessel early. Owners

sold the vessel for US$24 million, which was

significantly more than the vessel was worth when the

vessel was originally due to be redelivered. Owners

claimed damages. Charterers asserted that credit

should be given for the money made from the early

sale of the vessel.

The Supreme Court reversed the decision of the Court

of Appeal and held that no credit should be given. The

decision to sell was a commercial decision independent

of the breach of the charterparty.

Photographer: Hans Deijs

COMMODITIES IN FOCUS EDITION 2

17

In the news

Industry news

Relaxation of trading restrictions in Myanmar

– Notification No. 36/2017

On 12 June 2017, the Ministry of Commerce issued

Notification No. 36/2017 ("Notification No. 36/2017")

to further liberalize trading in Myanmar.

Under Notification No. 36/2017, the Ministry of

Commerce ("MOC") has now granted permission to

foreign-owned companies in Myanmar (including

100% foreign-owned companies) to trade, whether

as retail or wholesale, the following classes of goods

as prescribed by the Myanmar Harmonized System

code (HS code):

• chemical fertilizers;

• seeds;

• pesticides;

• hospital equipment; and

• construction materials.

This is a further relaxation of the trading restrictions

imposed by the Myanmar authorities, as the previous

notifications issued by the MOC required foreigners

to form joint venture companies with Myanmar

citizens to trade in such goods.

Saudi panel approves suspension of steel

export duty

Saudi Arabia’s Ministerial Provisioning Committee

has approved the suspension of duties on steel

exports for two years and cut fees on cement

exports by fifty percent.

The move is intended to encourage local producers

and industries to compete on the international

markets.

LMEprecious

The LME launched its new suite of precious metal

futures on Monday 10 July. It was reported that 2.6

million ounces of gold and 12.8 million ounces of

silver was traded through LMEprecious contracts in

their first week of trading.

LBMA Silver

ICE and the London Bullion Market Association

(LBMA) announced on Friday 14 July that ICE

Benchmark Administration (IBA) has been chosen as

the new administrator for the LBMA Silver Price. IBA

is expected to assume responsibility for the LBMA

Silver Price in autumn 2017, having done so for the

LBMA Gold Price since 2015.

New LMAA Rules 2017

The new LMAA Terms 2017 are now in force. They

will apply to all LMAA arbitral proceedings

commenced on or after 1 May 2017.

Late payment of insurance claims

All insurance contracts entered into or varied on or

after 4 May 2017 will now contain an implied term

that insurers will pay claims under policies within a

reasonable time (following the entry into force of

sections 13A and 16A of the Insurance Act 2015).

If claims are not paid within a reasonable time, the

insurers may be liable to pay damages for the delay.

COMMODITIES IN FOCUS EDITION 2

18

Stephenson Harwood news

Korea team welcomes two marine and

offshore disputes specialists

We are delighted to welcome experienced shipping

and shipbuilding and offshore construction disputes

specialists, Hong Bin Choi and Daehee Lee, to our

Korea team.

Hongbin joins the team as

of counsel. Having served

as the head of the

international legal affairs

department of one of the

major Korean shipyards,

Hong Bin has vast experience in drafting, reviewing

and negotiating EPC and shipbuilding contracts,

subcontracts for engineering and major equipment,

and compliance issues in respect of offshore

production facilities, rigs, commercial and military

vessels. He also has strong international trade,

commodities and insurance experience.

Daehee’s practice primarily

focuses on shipping and

onshore and offshore

construction disputes in

international arbitration

proceedings. He has strong

commercial acumen having worked as in-house

counsel at one of the largest construction and

engineering companies in Korea. Prior to joining

Stephenson Harwood, Daehee was a navy legal

officer of the Republic of Korea Navy, advising on

maritime security law in relation to counter-piracy

operations off the coast of Somalia and maritime

surveillance operation for merchant vessels passing

through the Internationally Recommended Transit

Corridor in the Gulf of Aden. He is fluent in both

English and Korean and admitted to practice law in

England & Wales, Australia and New Zealand.

Michael Kim, Seoul office managing partner says:

“I am delighted to welcome Daehee and Hong Bin to

the team. The recruitment of two very exceptional

lawyers to the team further strengthens our market

leading service and commitment to the Korean

maritime market.”

Stephenson Harwood's associated Chinese

firm, Wei Tu*, welcomes three new partners

and promotes a fourth

Stephenson Harwood LLP's associated firm in China,

Wei Tu, has strengthened its practice with the arrival

of partners Xiangman Shen, Kehua Zhang and

Henry Zhu (in the marine and international trade

team), as well as the promotion of Zoe Zhou to

partner. Wei Tu is based in the city of Guangzhou.

Mr Zhu's practice is focused

on dispute resolution, and

he brings more than 15

years of experience

supporting clients in court

litigations and arbitrations

across mainland China and Hong Kong. He has a

wide range of experience in dry shipping and

international trade, charterparties, marine and non-

marine insurance, cargo forwarding, financial

facilities and commercial disputes. He joins Wei Tu

from Rolmax.

"The firm has been represented in Guangzhou for

more than 22 years since we launched an office in

the city in 1994," said Voon Keat Lai, Stephenson

Harwood's Greater China Managing Partner.

"Expanding the team in Guangzhou, and establishing

full practice capabilities, is fundamental to providing

the very best PRC law support to our Chinese clients

and international clients doing business in China."

*Wei Tu (a PRC law firm registered in Guangzhou).

International arbitration specialist Timothy

Cooke joins Stephenson Harwood

(Singapore) Alliance as partner

Stephenson Harwood (Singapore) Alliance has

strengthened its arbitration practice with the addition

of Timothy Cooke as a partner.

Timothy has been in

practice for 17 years and is

listed by Who's Who Legal

(2017) as a Future Leader

in Arbitration as well as in

other legal directories. He

is also the author of a forthcoming international

arbitration title to be published by Sweet & Maxwell

in early 2018.

COMMODITIES IN FOCUS EDITION 2

19

Tokyo Shipping News seminar

Lawyers from our London, Singapore and Hong Kong

offices hosted the Tokyo Shipping News seminar at

the British Embassy in June.

Hot topics for discussion included the developing

situation in Qatar, maritime insolvency and the new

accounting standards. Speakers included Andrew

Rigden Green, Sean Gibbons, Michelle Yong, Janice

Lee, Cris Evans and Stuart Beadnall. Mike Phillips

and Durai Shunmugam also attended.

This event forms part of our Shipping News

roadshow that focuses on the latest challenges

affecting the maritime and international trade

industry. Other recent events have been held in

Hong Kong, Taipei, Seoul, Guangzhou and Shanghai.

Stephenson Harwood has been shortlisted in

the i-Law Maritime Law award 2017 category

of the Lloyd's List Global Awards

The award celebrates the very best in the legal

profession and seeks to identify those organisations

which have best served the maritime industry over

the last twelve months.

The final result will be announced at the awards

ceremony, held on 27 September.

Stephenson Harwood named 'Law firm of the

Year' by Operational Risk

Stephenson Harwood LLP has been named 'Law firm

of the Year' at the Operational Risk Awards 2017, for

the second year running.

COMMODITIES IN FOCUS EDITION 2

Disclaimer

© Stephenson Harwood 2017. Information contained in this document should

not be applied to any set of facts without seeking legal advice. Any reference

to Stephenson Harwood in this document means Stephenson Harwood LLP

and/or its affiliated undertakings. Any reference to a partner is used to refer

to a member of Stephenson Harwood LLP.