The UK’s financial regulators will launch a “chaotic market” review of the nickel deal last month after an unprecedented price hike suspended trading on the London Metal Exchange for eight days.
The 145-year-old exchange was forced to suspend nickel deals and cancel one-day valuable trades after Russia’s invasion of Ukraine on March 8 disrupted the market.
Nickel rose 250 percent in the wake of the suspension, and Chinese metal tycoon Jiang Guangdar hit a bet that prices would fall. The LME, which owns the Hong Kong Exchange and Clearing, said the price hike had pushed several smaller members of the exchange to the brink of failure. But the decision to delete the business one day has caused tension among other members.
As trading becomes more stable, the Financial Conduct Authority and the Bank of England’s chief regulator, LME, said on Monday they would launch a review “to determine what lessons can be learned about LME governance and market surveillance.” The exchange has announced that it will set up a separate independent review to view trading around March 8.
The event “represents a huge challenge for LMEs and I am very aware that there is a lot of frustration and it has damaged the reputation of LMEs,” said Matthew Chamberlain, chief executive of the exchange.
The reviews are expected to focus on the role of investment banks in nickel transactions in large markets outside the LME. The location of customers is not regularly reported, although the exchange has the right to request them.
Chamberlain said the price review would look at the behavior of all market participants, including those with long positions.
“We are not sitting here saying that abuse has happened but it is happening. . . It is true that we review all the activities and make sure that we are fully satisfied with what has happened, “he said.
“It simply came to our notice then that this review would be much more complex than the ones we’ve taken in the past.”
Guandar’s position was so large, and was mainly held through derivative agreements with several banks, that exchanges saw only one-fifth of the entire position. As banks disclose their holdings, it becomes aware of the full scale of the market.
The Bank of England will conduct a similar review at LME Clear, the exchange’s clearing house that handles counterparty risk. The Prudential Regulatory Authority, which is responsible for banks and institutions that trade in LMEs, will be “more involved” with companies that were in a large position in the metal during the trading turmoil.
The FCA and Boeing have said they will hire an expert to lead the investigation, and they have called on the exchange to be vigilant during the Ukraine war, which is putting pressure on some markets.
“The FCA and the Bank will consider these reports to determine whether further action should be taken and will announce further steps in due course,” the statement said. Authorities added that the LME would appoint additional independent directors to strengthen its rule.
LME’s board lacks experience in metals, with most non-executive directors having spent their careers in the finance or securities market.
“There’s a clear line between regulators and LMEs that it would be great to have more experience and subject matter expertise on board,” said Chamberlain.