The London Metal Exchange should strengthen its rules and oversight to prevent short-term market distortions, according to an independent review of March’s nickel market chaos which found the marketplace had insufficient tools to stop prices spiralling out of control.
The report, conducted by consultancy Oliver Wyman, laid out further details on the depth of the crisis in the run-up to a decision by the LME, the world’s largest hub for metals trading, to suspend nickel trading for a week and cancel billions of dollars’ worth of trades.
LME’s radical step on March 8 came after nickel prices surged 270 per cent over three trading days to exceed $100,000 per tonne, when a bet on falling prices by China’s Tsingshan, the world’s largest stainless steel producer, collided with fears of sanctions on Russia, a large nickel producer.
The report found that one of the key problems that stopped the LME from doing more to prevent the crisis was that it lacked visibility on the size of two large short positions held in over-the-counter derivatives, which are private transactions directly between two parties off the exchange — one of which was known to be held by Tsingshan.
However, it also said that while the LME typically looked for indications that traders were trying to corner the market with large positions on particular dates, it said the LME “did not routinely” investigate large net positions and ask members to explain them. “This reduced the likelihood of identifying the scale of over-the-counter positions,” it said.
The report also highlighted shortcomings in the LME’s mechanisms to cool down outsized price moves, pointing out that the exchange did not have circuit breakers or limits to restrict or halt trading for longer periods. “In this instance, the independent review believes that where price increases were driven by short closing in thin liquidity, longer halts to trading would have been the most helpful.”
The review also adds to mounting evidence on the gravity of the crisis and stress on the 146-year-old exchange before it halted and reversed trading.
The LME is facing investigations from its regulators at the Bank of England and Financial Conduct Authority over its handling of the crisis, and is defending itself against lawsuits totalling $470mn by hedge fund Elliott Management and market maker Jane Street over the cancelled trades.
“The independent review has confirmed our concerns that the LME lacked the systems and controls to manage through the March 2022 nickel crisis, but it is essential that a robust regulatory review addresses how 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 $1.4bn of over-the-counter margin calls had been missed on March 7, more than 10 times the six-month average. At least three of the 10 largest short position holders were overdue on paying margin towards a subset of LME members when prices pushed higher on March 7, the report added.
On March 7 LME Clear, the exchange’s clearing house, suspended intraday margin calls at 13:30 for the rest of the day after demanding $7.5bn. The price increase of nickel that day, 69 per cent, was more than three times the size of the largest ever price move.
In response, the LME said it would prepare an implementation plan for the report’s recommendations, to be published by the end of March. It pointed out that it had already taken some measures, including implementing daily price limits and over-the-counter position reporting for all physically delivered metals. “The publication of this report is an important further step in rebuilding confidence in the LME nickel market,” it said.
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