The UK’s regulators said they would probe the London Metal Exchange’s 8 March suspension of nickel trading, a decision the exchange took after a disorderly market arose, which raised questions about the LME’s transparency.
A squeeze on one fund’s massive short of nickel triggered the price to more than double on 8 March. The LME then halted trading and pushed back the clock a day, wiping trades that would have been lucrative for some.
“Events around the suspension and resumption of trading have underlined questions raised in a recent LME Discussion Paper on Market Structure, particularly the role of transparency in the LME and related markets,” the Financial Conduct Authority and Prudential Regulation Authority said in a joint statement on 4 April.
The LME said in a statement on 4 April that it will also commission an independent review around the broader events surrounding the 8 March nickel trading suspension, “to identify any actions that could be taken to minimise the risk of a disorderly market arising in future”.
While the full and detailed scope of the review has yet to be determined, the LME said it would also look into OTC trading during the period of instability, consider suggestions to reform market practices that were already previously raised, assess what volatility controls it should have long term, and look into a “more stringent position management regime”. It said it would also look at other market reform recommendations from other market stakeholders
The notice of the inquiry comes as the LME’s chief executive, Matthew Chamberlain, steers the organisation through a tumultuous period during his final month as head of the metal trading platform — in January he confirmed he would leave the 145-year-old group to join Jersey-based digital assets firm Komainu as CEO.
LME owner Hong Kong Exchanges and Clearing Limited
said Adrian Farnham, head of LME Clear, will become interim LME CEO and head of commodities as of 1 May. He will join HKEX’s management committee and report to group CEO Nicolas Aguzin.
The regulators noted the timing of the review amid a more stable period of trading for nickel.
In their statement, which includes the Bank of England – responsible for the supervision of LME Clear as a central counterparty – the regulators noted their previous focus was a return to orderly trading in nickel amid the “challenging commodity market conditions” following Russia’s invasion of Ukraine.
“The FCA has been in discussion with the LME on its proposals for some time and expects the LME to consider carefully how recent events should shape its future approach on market structure,” the regulator said.
It also noted that the LME “has agreed the benefits of appointing additional independent directors to strengthen its governance” and will review how to achieve this in the context of the skills and composition of its board.
The BoE will also review the operation of LME Clear during the halt in nickel trading, “to determine whether any lessons might be learned in relation to its governance and risk management”.
The FCA and the Bank intend that these reviews will be assisted by the appointment of skilled persons who will issue reports on their investigations, in line with market rules.
“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. The PRA and FCA will also be engaging further, through their supervisory processes, with firms who held significant positions in the market to assess the effectiveness of their risk management and governance during the period,” the regulators’ statement said.