The London Metal Exchange has been hit by new lawsuits from ten hedge funds including AQR Capital Management over its decision to cancel billions of dollars in nickel trades last year.
(Bloomberg) — The London Metal Exchange has been hit by new lawsuits from ten hedge funds including AQR Capital Management over its decision to cancel billions of dollars in nickel trades last year.
The legal action adds to the pressure on the 146-year-old exchange, coming just days after the UK’s market regulator announced a rare enforcement investigation into the LME’s conduct in the lead-up to the crisis.
Nickel prices spiked 250% in a little more than 24 hours last March in a short squeeze centered on top producer Tsingshan Holding Group Co. The LME’s decision to cancel seven hours of trading as prices rose from $50,000 to $100,000 a ton triggered widespread condemnation from the hedge fund industry, with AQR founder Cliff Asness among the exchange’s most virulent critics.
The LME has said that acted to protect the broader metals industry, which could otherwise have entered a “death spiral” triggered by $20 billion in margin calls. On Monday, LME parent Hong Kong Exchanges & Clearing Ltd. said AQR and four other funds were seeking about £80 million ($96 million) in damages. The LME believes the suit is “without merit,” according to the statement.
Separately on Monday, Pala Investments Ltd. and four funds including Commodity Asset Management LLC also filed a suit in London.
The new claims come on top of judicial review proceedings brought by Elliott Investment Management and Jane Street last year. The AQR claims don’t raise any issues that are not already subject to the earlier proceedings, and will be on hold pending their outcome, according to the statement.
This week marks one year since the crisis that brought the LME to its knees, and the exchange is still struggling through the fallout. The nickel contract is thinly traded and often erratic, while the investigation announced last week by the UK’s Financial Conduct Authority means the repercussions could drag on even longer, potentially culminating in fines or formal censure. And the nickel crisis on the LME has been held up by institutions including the International Monetary Fund as a cautionary tale of the risks lurking in global commodities markets.
The timing of the latest lawsuits may relate to one of the legal arguments brought by Elliott in its case — that the cancelation of trades was a violation of human rights; under the UK’s Human Rights Act, claims must generally be brought within one year of the alleged violation.
AQR and the four other firms named in the same claim previously sought key documents from the exchange in court, but failed in their attempt to force the LME to hand over transcripts of key phone calls and communications.
For the nickel market, there is one bright light on the horizon, as the LME prepares to allow trading during Asian hours for the first time since the crisis, starting from March 20. The shortened trading day has made it harder to arbitrage between London and Shanghai contracts, and the exchange is hoping the return to regular hours will help boost liquidity.
–With assistance from Jonathan Browning and Eddie Spence.
(Updates with context on Human Rights Act in eighth paragraph.)
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