By Polina Devitt and Eric Onstad
LONDON (Reuters) – Britain’s financial regulator fined the London Metal Exchange on Thursday for allowing nickel prices to surge out of control three years ago in the first ever enforcement action against a UK exchange.
The Financial Conduct Authority imposed a penalty of 9.2 million pounds ($11.9 million) on the world’s oldest and largest market for industrial metals after an investigation found multiple failures to deal with severe market stress.
The FCA said only junior staff were on duty in the early morning of March 8, 2022, when nickel prices rocketed to more than $100,000 a metric ton, more than doubling in a matter of hours.
“This meant that when price rises in the nickel contract became increasingly extreme during the early hours of 8 March it was not escalated to senior LME managers,” the FCA said in a statement.
The extreme volatility forced the LME to void $12 billion in trades, sparking a lawsuit by financial firms who said they lost hundreds of millions of dollars. The LME won the lawsuit, but the trial exposed shortcomings in LME controls.
“The LME nickel fiasco is a textbook example of how not to run a global exchange,” said Simon Morris, a financial services Partner with law firm CMS.
“Policies for handling market stress were unclear, front-line staff weren’t trained to know what to do or who to tell, and when senior management were briefed they were uncertain how to respond.”
The LME’s nickel crisis was compounded by low stocks and the lack of physical delivery options available to big short position holders such as China’s Tsingshan Group.
“The LME should have been better prepared to address the serious risks posed by extreme volatility,” said Steve Smart, joint executive director of enforcement and market oversight at the FCA.
LME ACCEPTS FINDING
The 148-year-old LME, owned by Hong Kong Exchanges and Clearing Ltd., accepted the findings and qualified for a 30% reduction in the financial penalty, adding that enhanced processes now in place will bolster the resilience of its markets.
“We … acknowledge that we could have provided a better line of defence to the effects of the disorder in the OTC market, which had spilled over onto the LME market in March 2022,” said Chief Executive Matthew Chamberlain.
The LME said it also welcomed the FCA’s recognition of the fact that large positions held on the over-the-counter (OTC) market were the principal driver of sharp price moves and that the LME didn’t have visibility of OTC positions at the time.
Banks and brokers are obliged to report their OTC trades with trade repositories such as the Depository Trust and Clearing Corporation (DTCC), which the FCA has access to.
Hedge fund Elliott Associates, which sued the LME, and several sources at LME brokers declined to comment.
“The absence of a robust regulatory response to the nickel crisis will erode investor confidence in UK markets and undermines efforts to secure UK as a global financial centre,” Jennifer Han, Chief Legal Officer at the Managed Funds Association (MFA), said in an emailed statement.
MFA is an international hedge fund trade association.
Nickel trading volumes plummeted in the wake of the crisis, with some unhappy investors boycotting the LME over its cancellation of trades.
But by this year, LME nickel volumes have fully recovered, with trading activity the strongest since 2015.
“We all know the LME made mistakes, but we’ve moved on and the nickel market has recovered,” said one industry source.
(Additional reporting by Sinead Cruise and Pratima Desai; Editing by Veronica Brown, Louise Heavens and David Evans)
