* Financial institutions activity boosts volatility
* LME stocks management should be independent
* More light needed on dominant position of major operators
(Adds details, comments)
By Svetlana Kovalyova
MILAN, Oct 14 (Reuters) - Italian non-ferrous metals body Assomet is asking financial regulators to rein in the power on the London Metal Exchange (LME) of financial institutions, such as pension and hedge funds and merchant banks.
Financial institutions have injected much-needed liquidity into commodities markets but in the past few years their activities have increased price volatility, Assomet said in a statement to be published in coming days in its newsletter and obtained by Reuters on Thursday.
These institutions have propelled commodities prices "to distorted levels which have little to do with real demand and supply," and they should be made to pay the entire value of metal in derivative contracts, not just margins, Assomet said.
Moreover, financial institutions have practically taken control over the LME because their brokerages are among the bourse's main shareholders as well as its pincipal operators, it said.
LME declined to comment on the Assomet statement.
Assomet said it was concerned that financial institutions that have recently acquired LME-registered warehouses could raise speculative profits by using their knowledge of stock movements.
Assomet did not name such institutions and said management of LME inventories should be independent.
Early this year, Goldman Sachs announced its purchase of U.S.-based warehouse and logistics company Metro International Trade Services which runs a global network of LME approved metal warehouses.
There have been other deals since, such as that in which Pacorini's metals warehousing unit fell into the hands of the world's biggest commodity trader, Glencore International.
The LME has said all warehouses are regularly inspected and where there is a relationship between a trader and a warehouse company it checks that so-called Chinese walls are in place.
Assomet said more transparency was necessary about dominant position of major operators of the LME and about control of official stocks.
Other organisations and trade associations have made similar criticisms and written similar letters to the LME but were unlikely to change the way the LME operates, Robin Bhar, analyst at Credit Agricole, said.
"It doesn't surprise me but in practical terms ... I don't see those criticisms as forcing the regulators, and more so the exchange, to change any of its trading practices or procedures," Bhar told Reuters.
Assomet, like some other industrial operators, has also been irked by the launch of exchange traded commodities (ETC) on metals traded on the LME, which are seen adding volatility to trade.
"Launch of a new financial instrument aimed to raise more private investment in commodities cannot but give a new impulse to "financialisation" of mercantile bourses," it said. (Additional reporting by Marie-Louise Gumuchian in London; editing by Anthony Barker)