Sumitomo copper, 1996

At a glance

What happened

For a decade Sumitomo Corporation's head copper trader was one of the most powerful figures in the world copper market, holding large positions in LME futures and warehoused metal. He was also hiding losses that went back to the 1980s, using unauthorised trades and accounts kept off the company's books. A tight market and steep backwardation in 1995 drew complaints and regulatory attention. Sumitomo announced the unauthorised trading in June 1996, and the loss eventually reached about $2.6bn.

Why it went wrong

Holding enough of the nearby futures and deliverable metal lets a dominant long keep prices above where supply and demand would put them, which looks profitable as long as the position is held. But a position that props up the market can only be sold into a falling one. Concealment worked because one person controlled the trading, the records and the broker relationships. Once he was moved off the desk, the positions had to be unwound and copper fell sharply.

What it teaches

Concentration risk can sit in a person as well as a position. A market can be held away from its natural level for a long time, which makes a dominant position look good right up until the exit. The LME's rules on dominant positions, which require large holders to lend metal back at capped premiums, date from this case.

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.

Where it sits in the course

Case studies like this one are used throughout risk management teaching, including FRM® preparation, as worked examples of operational and concentration risk; market manipulation. In OTC Learn the lesson runs in five steps: what happened, the position, why it broke, what it cost and what it teaches, followed by a worked example with the numbers. See the lesson outline.

Related case studies

• The LME nickel squeeze, 2022A hedge that could not be delivered into
• Barings, 1995One trader, both sides of his own desk

The instruments behind it

OTC Learn lessons on the products this case turns on:

• Commodity ForwardAgree a price today for delivery later