LME set to defend itself in 3-day trial in London over nickel chaos from last year’s trading freeze

The HKEX-owned bourse faces lawsuits from US hedge fund Elliott Associates and quantitative investing firm Jane Street Global Trading
The trial comes 15 months after the bourse suspended trading and cancelled nickel trades following a short squeeze in March 2022

Banking & finance

Chad Brayin London

Published: 6:30am, 19 Jun 2023

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The London Metal Exchange (LME) is preparing to defend itself in court on Tuesday, more than a year after it was forced to suspend nickel trading following a short squeeze that threatened to destabilise the global market in March 2022.

US hedge fund Elliott Associates and quantitative investing firm Jane Street Global Trading have sued the 146-year-old bourse in London, saying its actions to stem the chaos favoured some clients over others and violated their rights under the European Convention on Human Rights.

“The LME maintains that Elliott’s and Jane Street’s grounds for complaint have no merit and are based on a fundamental misunderstanding of the situation on 8 March 2022 and the decisions taken by the LME,” an LME representative said. “All the actions taken on 8 March were lawful and made in the interest of the market as a whole.”

The case will be heard before two judges in the UK High Court over three days this week. Elliott is seeking US$456 million in damages, while Jane Street is seeking US$15.3 million.

Can HKEX-owned LME rebuild its reputation a year after nickel chaos?

The trial comes just over 15 months after the nickel market descended into chaos in March of last year as the metal’s price soared more than 270 per cent over a three-day period following Russia’s invasion of Ukraine, triggering nearly US$16 billion in margin calls.

The rapid price movement squeezed dozens of short-sellers, including the world’s largest stainless steel producer, Tsingshan Holding Group of China.

The Hong Kong Exchanges and Clearing (HKEX)-owned bourse suspended trading and cancelled billions of dollars of transactions on March 8, 2022, a move that has sparked a series of legal actions and an enforcement inquiry by British regulators over the LME’s response.

Since last year’s chaos, the LME has introduced a series of measures to try to avoid similar situations in the future, including daily price limits for contracts that require metals to be physically delivered when a futures contract expires.

Matthew Chamberlain, the LME” s CEO, speaks during the LME Asia Metals seminar in Hong Kong in May. Photo: Bloomberg

Last summer, the bourse also began requiring its members to report their over-the-counter (OTC) positions on a weekly basis for these metals, including contracts for aluminium, copper, nickel, tin and zinc.

In January, an independent review by the consulting firm Oliver Wyman found the LME needed to tighten its rules to improve its ability to identify and prevent future market distortions, including adopting LME-specific position limits and revamping its existing accountability level framework to help address risks created by large positions.

In March, the bourse said it would overhaul its margin requirements and introduce a new nickel contract focused on the Asian markets to improve liquidity. It also said it would seek to further enhance its monitoring of liquidity and OTC positions, as well as make daily price limits on physically delivered metals a permanent feature of its markets going forward.

Large off-exchange positions in nickel have been partially blamed for chaos.

LME to overhaul margins, introduce new nickel contract in market revamp

Despite the reforms, average daily trading volumes for nickel continue to lag their February 2022 levels, as the LME struggles to rebuild its reputation, with an average of 37,746 lots of nickel traded every day in May. That compared with 85,639 lots a day in February of last year.

Chamberlain said last month that the exchange is making “incremental” progress in restoring investor confidence.

“I don’t think restoring confidence is something that just happens overnight,” Chamberlain told the Post on the sidelines of the LME Asia Metals Seminar in Hong Kong in May. “Every day you have to show you’re doing something to earn that trust, and people have to see the market behaving as it should, which it is, and then eventually, you get there.”

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