UK financial regulators will launch a review into the “disorderly market” in nickel contracts last month when an unprecedented price spike led to an eight-day suspension of trading on the London Metal Exchange.
The 145-year-old exchange was forced to freeze nickel contracts and cancel a day’s worth of trades on March 8 after Russia’s invasion of Ukraine upset the market.
Nickel had surged 250 per cent in the lead-up to the suspension and squeezed a bet by Chinese metals tycoon Xiang Guangda that prices would fall. The LME, which is owned by Hong Kong Exchanges and Clearing, said the price spike had pushed several smaller members of the exchange to the brink of failure. But its decision to erase a day of trading has provoked uproar among other members.
With trading more stable, the Financial Conduct Authority and the Bank of England, the LME’s main regulators, said on Monday they would begin a review “to determine what lessons might be learned in relation to the LME’s governance and market oversight arrangements”. The exchange also announced it would set up a separate independent review to look at the trading around March 8.
The event “represents a huge challenge for the LME and I’m very conscious there’s a lot of anger and it has damaged the reputation of the LME”, said Matthew Chamberlain, chief executive of the exchange.
The reviews are expected to focus on the role played by investment banks in trading nickel in the huge market outside of the LME. Customers’ positions are not regularly reported, although the exchange has the right to request them.
Chamberlain said its review into the price would look at the behaviour of all market participants, including those with long positions.
“We’re absolutely not sitting here saying abuse has taken place but it is . . . right that we review all of the activity and make sure we are absolutely satisfied we account for everything that’s happened,” he said.
“It’s certainly the case that this review will be far more complex than ones we have undertaken in the past.”
Guangda’s position was so large, and mainly held through derivatives contracts taken out with several banks, that the exchange saw only a fifth of the full position. It became aware of the full scale of the market as the banks disclosed their holdings.
The Bank of England will conduct a similar review into LME Clear, the exchange’s clearing house that manages counterparty risk. The Prudential Regulation Authority, which is responsible for banks and institutions that trade on the LME, will be “engaging further” with companies that held large positions in the metal at the time of the trading chaos.
The FCA and the BoE said they would appoint an expert to lead the inquiry and they urged the exchange to remain vigilant during the Ukraine war, which is putting a strain on supplies in some markets.
“The FCA and the bank will consider these reports in determining whether further action should be taken and will announce next steps in due course,” their statement said. The authorities added that the LME would appoint additional independent directors to strengthen its governance.
The board of the LME lacks experience in metals with most of its non-executive directors having spent their careers either in finance or securities markets.
“There’s a clear alignment between the regulator and the LME that it would be great to have even more experience and subject matter expertise on the board,” said Chamberlain.
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