Hedge fund group files complaint against LME over March nickel trading chaos

Managed Funds Association claims LME failed to properly carry out its regulatory obligations by cancelling nickel trades in early March
Trading suspension was only the second time the 145-year-old bourse cancelled trading in one of its metals in its history

Banking & finance

Chad Brayin London

Published: 11:03pm, 8 Jun, 2022

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An influential trade body representing some of the world’s biggest hedge funds has filed a formal complaint with the London Metal Exchange (LME) over its handling of a chaotic period that saw trading in nickel suspended in early March.

The Managed Funds Association (MFA), in a letter, claims the LME failed to properly carry out its regulatory obligations when it halted nickel trading and cancelled thousands of trades made during the early hours of March 8 as the metal price surged.

It was only the second time in the 145-year-old bourse’s history that it had cancelled trading in one of its metals and came as soaring prices threatened to destabilise the market amid a short squeeze that triggered billions of dollars in margin calls.

“The LME has undermined confidence in its ability to oversee markets by failing to perform its regulatory obligations to maintain an orderly market, manage conflicts of interest, and protect investors in the nickel market,” Jennifer Han, the MFA’s chief counsel, said.

Traders operate in the open outcry ring at the London Metal Exchange. Photo: AFP

The complaint comes just days after the bourse, which is owned by Hong Kong Exchanges and Clearing (HKEX), was sued by two affiliates of American hedge fund Elliott Management and quantitative investing firm Jane Street Global trading.

In a suit filed in England’s High Court of Justice, Elliott International and Elliott Associates claimed the trading suspension and trades cancellation “constituted a violation of [their] human rights”, with the bourse either exceeding its authority or acting “unreasonably and irrationally”. The Elliott affiliates are seeking US$456 million in their suit.

The LME has said the claims are without merit and it would vigorously defend itself against the allegations.

The bourse said this week that the nickel market had become “disorderly” in the early hours of March 8 and the decision was made to cancel trades in order “to take the market back to the last point in time at which the LME could be confident that the market was operating in an orderly way”.

A LME spokeswoman said that MFA’s complaint would be managed via its existing complaint procedures.

“We are committed to ensuring that the actions of all participants in respect of the nickel trading suspension (including the LME itself) are fully reviewed,” she said.

Nickel prices, alongside other commodities, rose dramatically in early March following Russia’s invasion of Ukraine and amid concerns about supply shortages.

Prices at one point surged 250 per cent in just over 24 hours, threatening dozens of short sellers, including the world’s largest stainless steel producer Tsingshan Holding Group.

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Traders have claimed the cancellation of trades unfairly favoured some market participants over others. The International Monetary Fund has also called for the LME to strengthen its governance mechanisms to avoid potential conflicts of interest.

Britain’s financial regulators said in April that they plan to conduct a review of the LME’s handling of the unprecedented suspension in nickel trading, while the bourse has announced it will conduct its own independent review.

The bourse has separately proposed new requirements that its members report their over-the-counter (OTC) positions on a weekly basis for metals contracts that require the metal to be physically delivered when a futures contract expires.

London Metal Exchange CEO Matthew Chamberlain speaks during the LME Asia Week forum in Wan Chai in 2018. Photo: Xiaomei Chen

Matthew Chamberlain, the LME’s CEO, has pointed to the lack of transparency in OTC positions as one reason the bourse struggled to identify and manage the situation.

In a June 1 letter, the MFA said it supported the LME’s efforts to address issues surrounding disorder in the nickel market, but had “significant reservations” about the OTC reporting proposal.

“Although LME believes that market visibility was a factor in the events which arose on its nickel markets, it would be premature for LME to proceed with its proposals prior to the fuller reviews of UK regulators and of the LME,” the trade body said.

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