The UK’s markets watchdog opened an investigation into the London Metal Exchange over its handling of the massive short squeeze in the nickel market last year, escalating pressure on the embattled exchange and raising the prospect of financial penalties.
(Bloomberg) — The UK’s markets watchdog opened an investigation into the London Metal Exchange over its handling of the massive short squeeze in the nickel market last year, escalating pressure on the embattled exchange and raising the prospect of financial penalties.
The probe by the Financial Conduct Authority enforcement division follows an initial review announced last year by the regulator, while the Bank of England, which regulates the LME’s clearinghouse, said separately that it must strengthen governance and improve risk management, and plans to appoint an independent monitor.
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., prompting the LME to suspend the market for a week and, most controversially, cancel billions of dollars of trades at the highest prices.
The crisis has thrust the LME into the global spotlight — the International Monetary Fund criticized its governance, while Citadel Securities’ Ken Griffin described the events as “one of the worst days in my professional career in terms of watching the behavior of an exchange.” The LME is being sued by hedge fund Elliott Investment Management and trading firm Jane Street over its decisions during the crisis, while its nickel market — the global benchmark — is still plagued by illiquid and erratic trading.
The FCA said Friday it has opened an enforcement investigation into some of the LME’s “conduct and systems and controls” from the start of last year up to the March 8 suspension. It did not provide further details on the probe.
The FCA begins enforcement investigations “where we have reason to believe serious misconduct may have taken place,” according to its website.
“Since the suspension the FCA has made clear its expectation that the LME should consider carefully how the events of March 2022 should shape its future approach on market structure, including the role of transparency in facilitating effective risk management,” the FCA said in its statement.
While the FCA and BOE have not provided details of the findings of their respective reviews, the LME in January published the results of an independent report it commissioned into the crisis, which laid bare a catalog of failings by the exchange in the run up to March 8 — including the fact that the exchange had failed to identify and policy large positions in the nickel market. Most of the large short position held by Tsingshan was held in the over-the-counter market, which the exchange doesn’t control and oversee.
The LME has said it was not aware of the size of Tsingshan’s position when prices began to surge in early March following Russia’s invasion of Ukraine. The exchange has defended its decisions as necessary to prevent a $20 billion margin call that would have sent the market into a “death spiral.”
Taken together, the LME, BOE and FCA reviews “pointed to several shortcomings across LME Clear’s governance, management and risk management capabilities,” the BOE said. “LME Clear will need to strengthen its governance arrangements, increase independence in management and governance at the CCP, and improve on its wider risk management.”
The Bank intends to appoint a representative to independently monitor, assess and report back on LME Clear’s implementation progress against remedial actions, it said in a statement.
The LME said it will cooperate with the FCA’s investigation, and LME Clear will incorporate the BOE feedback into a set of reforms that the exchange is planning to publish by the end of the quarter.
(Updates with details throughout.)
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