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London Metal Exchange faces FCA and Bank of England investigation over nickel market shutdown

Traders at the London Metal Exchange (REUTERS)
Traders at the London Metal Exchange (REUTERS)

The City’s top financial watchdogs have opened an investigation into the London Metal Exchange’s (LME) controversial recent shutdown of the nickel market.

The Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), part of the Bank of England, this morning said they would probe the LME’s handling of the market shutdown at the start of March to determine what “lessons might be learned” on governance, risk management controls and market oversight.

The LME suspended nickel trading on the morning of March 8 after Russia’s invasion of Ukraine resulted in “disorderly” conditions. The price of nickel doubled to more than $100,000 per tonne within an hour.

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Controversially, the LME reversed trades placed in the hour or so before the market was shut. That benefited Chinese metal tycoon Xiang “Big Shot” Guangda, who had bet on low nickel prices, but angered hedge funds who had made huge profits from the price swings. Some are now considering legal action.

The market remained closed for over a week and traders complained about a spate of technical glitches when trading resumed on Wednesday March 16. New circuit breakers were introduced to limit daily price moves, sparking days of shutdowns when the market reopened.

The FCA and PRA said a third party would be appointed to review the situation once the market settled down. Regulators will then decide “whether further action should be taken and will announce next steps in due course.” It raises the prospect of possible fines or special measures if investigators find the LME at fault.

Regulators said the LME had already “agreed the benefits of appointing additional independent directors to strengthen its governance.” The operator is now looking at how best to do this.

Regulators will also be engaging with traders caught up in last month’s market chaos “to assess the effectiveness of their risk management and governance during the period.”

LME CEO Matthew Chamberlain and Adrian Farnham, boss of LME Clear which oversees the settlement of trades, said in a joint statement the market “welcomes” the FCA and PRA review and announced an independent review of its own.

The pair said: “The events leading up to the suspension and resumption of Nickel trading were unprecedented. The LME fully recognises 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.”

Nickel was trading up 3.5% at $33,223 per tonne this morning.

The LME is one of the last open outcry trading rings in the City and traces its roots back to the 1500s. It was bought by Hong Kong Exchanges & Clearing for £1.4 billion in 2012.