UK’s Financial Regulation Authorities Conducting Review Into London Metal Exchange

Traders, brokers and clerks shout and gesture on the first day of in-person trading at the London Metal Exchange in London on Sept. 6, 2021. (Leon Neal/Getty Images)

City regulators have launched an investigation into the London Metal Exchange after it suspended nickel trading last month.

On March 8, the exchange, which is owned by Hong Kong Exchanges and Clearing, suspended its operations for more than a week and canceled billions of dollars of trades after experiencing significant volatility, prompted by supply fears amid Moscow’s invasion of Ukraine.

The volatility put pressure on commodity prices and saw nickel costs rise to $100,000 a tonne within a short period of time, leading the exchange to suspend trading for the first time in three decades.

The U.K.’s Financial Regulation Authorities (FCA) said on Monday that it would conduct a review of the exchange’s handling of the situation to “determine what lessons might be learned in relation to the LME’s governance and market oversight arrangements”.

The Bank of England said it would also undertake a similar review of the operations of the bourse’s clearinghouse, LME Clear, to “determine whether any lessons might be learned related to its governance and risk management.”

“Both the FCA and the Bank intend that these reviews will be assisted by the appointment of skilled persons to report on the matter,” regulators said. “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.”

Meanwhile, the bank’s Prudential Regulation Authority and the FCA will be engaging with firms who held “significant positions in the market to assess the effectiveness of their risk management and governance during the period.”

In a statement (pdf), the LME Group said it “welcomes” the announcement by the regulators.

“In addition, the LME Group will commission an independent review of broader events in the nickel market leading up to the suspension to identify any actions that could be taken to minimize the risk of a disorderly market arising in the future,” it added.

“The events leading up to the suspension and resumption of Nickel trading were unprecedented,” the bourse said. “The LME fully recognizes the impact of these events on a broad spectrum of market participants and understands that not all participants agreed with the course of action undertaken.”

“The LME sought to act in the interests of the market as a whole and acknowledges the concerns expressed by some market participants.”

It added that it is committed to ensuring a full review of the actions taken by all participants, including the LME itself is undertaken, and that “appropriate actions are taken to both restore confidence and support the long-term health and efficiency of the market.”

The events on March 8 came as western sanctions against Russia threatened supplies from the country, creating panic in the market and leading buyers to rush for nickel, a metal that is crucial for making stainless steel and electric vehicle batteries.

Nickel, which traded between US$22,750 and US$25,260 a tonne in February, briefly hit $100,000 a tonne in the March 8 trading session.

One of the world’s top producers of stainless steel, China’s Tsingshan Holding Group, built up a massive short position ahead of the surge in nickel prices earlier this month and ultimately suffered $3 billion in losses.