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The UK financial regulator has levied its first penalty against an exchange, fining the London Metal Exchange £9.2mn for inadequate controls during a week of chaotic trading in the nickel market in 2022.
Junior staff were left in charge during six hours of Asian trading as the price of the metal spiked during a particularly volatile market, the Financial Conduct Authority said on Thursday.
The 148-year-old exchange did not have the “systems and controls” in place to ensure orderly trading and its failure to do so had “undermined the orderliness of and confidence in LME’s market”, the FCA said as it announced the fine.
Nickel prices jumped as much as 250 per cent in March 2022 in the wake of Russia’s invasion of Ukraine, squeezing Chinese steel producer Tsingshan, one of the biggest users of the market, which had bet prices would fall.
The LME, which sets global reference prices for industrial metals and is the world’s largest metals exchange, was forced to cancel a day’s trades and suspend the nickel market for eight days to prevent some customers from going bust trying to meet margin calls.
“London’s metal markets are of vital importance to the UK and global economy. We expect controls that match their significance,” said Steve Smart, FCA joint executive director of enforcement and market oversight, adding that the LME should have been “better prepared”.
The decision to unwind the trades caused hedge funds Elliott and Jane Street to lose profits of about $456mn and $15mn, respectively, and led to a wave of litigation, which the LME subsequently won. In a separate move on Thursday, the UK Supreme Court said it had denied Elliott permission to appeal the UK court judgements.
The market did not train staff to recognise a “disorderly” market and the “prevailing philosophy at the LME was that trading and price discovery should not be restricted even in times of extreme volatility”, according to the regulator.
The FCA also found that the automated systems the LME used to dampen volatile trading were partially suspended and “were of no effect during a time of extreme market conditions, and on the basis of a decision made by junior staff without any oversight from senior management”.
The day before the LME suspended trading on March 8, the exchange was forced to halt margin calls after repeatedly asking customers for payments to keep their trades open.
Members had already faced $7.4bn in margin payments, higher than the previous record of March 4, with further demands to come as the nickel price extended its rise. By the close the exchange’s own stability fund was nearly wiped out in the chaotic trading.
However the regulator said that overnight on March 7, the LME senior management did not brief the Hong Kong trading operations team about their concerns over the escalating price or the pressure on margin calls. Nor were they instructed to contact senior LME managers overnight if the price continued to rise.
“The Hong Kong Trading Operations team would be LME’s first line of defence during those early morning trading hours; no other LME staff would be on duty,” the FCA found.
The LME said on Thursday that it had implemented improvements to its controls since the episode.
“Since March 2022, significant work by both the LME and the FCA has materially reduced the risks of such an event from occurring again,” the exchange said.
https://www.ft.com/content/8b1caa13-d116-4bf2-a622-bde7e7fe14de
