Review urges LME to tighten standards on market distortions

The London Metal Exchange should strengthen its rules and oversight to prevent near-term market distortions, according to an independent inquiry into the nickel market chaos in March, which found the market lacked the tools to prevent prices spiraling out of control .

The report, prepared by consultancy Oliver Wyman, provided more details on the depth of the crisis ahead of a decision by the LME, the world’s largest metals trading hub, to suspend nickel trading for a week and cancel billions of dollars worth of nickel trades.

The LME’s radical move on March 8 came after nickel prices rose 270 percent in three trading days to over $100,000 a tonne, as a bet on falling prices by China’s Tsingshan, the world’s largest stainless steel producer, amid fears of sanctions against Russia collided, a major nickel producer.

The report found that one of the key issues preventing the LME from doing more to prevent the crisis was that it was over-sizing two large short positions in OTC derivatives, which were private transactions directly between two parties unknown by the exchange – one of which was known to be held by Tsingshan.

However, it also said that while the LME typically looked for evidence that traders were attempting to enter the market with large positions on certain dates, the LME “didn’t routinely” examine large net positions and asked members to explain them. “This reduced the likelihood of identifying the size of OTC positions,” it said.

The report also highlighted flaws in the LME’s mechanisms to cool outsized price moves, noting that the exchange had no circuit breakers or limits to constrain or halt trading for extended periods. “In this case, the independent review believes that where price increases were caused by brief closures amid low liquidity, longer trading disruptions would have been most helpful.”

The review also adds to the mounting evidence of the depth of the crisis and the strain on the 146-year-old exchange before it halted trading and reversed.

The LME faces investigations by its regulators at the Bank of England and the Financial Conduct Authority over their handling of the crisis and is defending itself against lawsuits totaling $470 million from hedge fund Elliott Management and market maker Jane Street of canceled deals.

“The independent review has confirmed our concerns that the LME lacked the systems and controls to deal with the March 2022 nickel crisis, but it is vital that a robust regulatory review addresses how the LME failed in its regulatory function said Jennifer Han, head of global regulatory affairs at the Managed Funds Association, a US lobby group.

The report found that $1.4 billion in OTC margin calls were missed on March 7, more than 10 times the six-month average. At least three of the top 10 short holders were overdue in paying margin to a subset of LME members as prices surged on March 7, the report added.

On March 7, LME Clear, the exchange’s clearing house, suspended intraday margin calls at 1:30 p.m. for the remainder of the day after demanding $7.5 billion. Nickel’s price surge that day, at 69 percent, was more than three times the biggest price surge of all time.

In response, the LME said it would prepare an implementation plan for the report’s recommendations, to be published by the end of March. She pointed out that she has already taken some measures, including the introduction of daily price limits and over-the-counter position reporting for all physically delivered metals. “The release of this report is an important further step in restoring confidence in the LME nickel market,” it said. Review urges LME to tighten standards on market distortions

Adam Bradshaw

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