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The city’s nickel crisis is an embarrassing failure

You may have thought that light touch regulation was abolished with the financial crisis. But no: it was alive and well in the City of London all along.

Monday’s announcement by regulators for review the suspension of the nickel market by the London Metal Exchange – and its Canceling trades after a price increase of 250 percent – smelled very much like being late for a party you were supposed to organize.

The Financial Conduct Authority, which is the regulator of the LME, and the Bank of England, which is responsible for overseeing its clearinghouse, will look for “lessons” in terms of governance, risk management and market oversight.

This comes after a major controversy that sparked allegations that the LME (possibly influenced by its owner HKEX) acted to protect the interests of Chinese group Tsingshan, which had built a huge short position in nickel rather than the market as a to protect whole. The LME said its handling of the situation was unaffected by the identity of the trader.

There is much to check – and the LME will conduct its own independent review. But here are two early thoughts. First, regulators themselves have questions to answer about their oversight of this market. Second, it is a bad idea to let market participants factually set the terms of their own regulation.

The reviews must aim to restore confidence in a market that remains weakened by events. It took more than two weeks for nickel trading to return to any degree of normality: first the market fell, hitting newly imposed trading limits for a few days before then hitting them in an upward direction instead.

trade is muffled over all metals. But activity in nickel lags by about two-thirds compared to other LME contracts, which are down about a quarter. According to analysts, there is still confusion as to whether exchange-traded prices for nickel reflect true value.

It’s really no secret what could have helped to avoid this crisis. Some of the obvious answers include limits on price movements, more transparency on over-the-counter or over-the-counter trades, dealmaking and position limits – all things that exist in the Shanghai market and have been proposed by the LME as recently as a year.

After the financial crisis, regulators stopped pushing commodities public as they did other derivatives. But that is doubtful everyone really checks the trade repositoriesor data warehouses that provide authorities with information about over-the-counter trades that should serve as a sort of surrogate.

What appears to be a light touch from regulators may have strengthened the ability of the traditional members of the LME, the large OTC trading banks, to lobby against fundamental reforms.

The LME, as a physical marketplace with a history of mutual ownership prior to its sale in 2012, operates differently than other trading venues. But it is Discussion Paper on Market Structure 2021 onwards is an interesting read now.

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The majority of members surveyed opposed position limits, although they were used elsewhere. Members also cited existing reporting requirements to resist greater transparency in over-the-counter positions, disclosure that would have allowed the identification of a huge risk accumulation like Tsingshan’s position.

There was a consistent split. On the one hand, members and traditional physical metal market traders (or interest groups, as we will call them) have tended to favor the status quo, even arguing that the exchange’s anarchic and Byzantine structure is a defense against competitors with better technology and a more interventionist approach.

On the other hand, non-members and financial traders such as hedge funds more often pointed out that the complexity of the LME acted as a barrier to entry, leading to less transparency, less competitive prices and higher trading costs.

Through lax regulation, weak management, or undue concern for members, the largest commodity banks appear to have been allowed to stall market modernization to protect a structure that made them money.

Both regulators and the LME should consider how this happened. Meanwhile Great Britain proposes the introduction “Competitiveness” as a post-Brexit goal for the city This is a reminder to regulators that the regulated industry often misjudges what is in its own best interest, let alone that of the system as a whole.

helen.thomas@ft.com
@helentbiz

https://www.ft.com/content/019dc32d-6d36-4e08-85a2-f6c2edcb01ee The city’s nickel crisis is an embarrassing failure

Adam Bradshaw

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