The decision to cancel executed trades and pending contracts avoided more than US$19 billion in margin calls that the LME claims would have forced about a quarter of its members into default and threatened the overall stability of nickel and its other metals trading markets.

Paul Singer’s hedge fund Elliott Associates and Jane Street Global Trading, however, believe the LME made a “hasty” and “irrational” decision to cancel profitable trades that morning when they claim it had the ability to take less extreme measures than revoking transactions to ease the escalating margin pressure and restore stability.

The bourse’s decision to “wind back the clock” on March 8, 2022, also favoured some traders facing a “short squeeze” over others – namely the world’s largest stainless steel producer, Tsingshan Holding Group of China, the firms said in court papers.

The case has a “broad relevance” to all markets, from regulated exchanges to multilateral trading facilities and clearing houses, said Jonathan Herbst, global head of financial services at law firm Norton Rose Fulbright in London.

“It’s all going to depend on precisely what the court actually says. Firstly, let’s take the situation where the court in this case does indeed come to the conclusion that the default action to stop trading and effectively wind back the price was not appropriate,” Herbst said.

“This could potentially have implications for confidence. This isn’t just about exchanges, it’s about any market infrastructure providers who could have to take default actions in what are, by definition, emergency situations.”

The dispute is being heard as a judicial review before two judges in London’s High Court, with a decision likely coming in the next few months following a three-day hearing in June.

Judicial reviews are typically used to challenge decisions by government departments, public authorities or regulators, but can be used to challenge bodies performing a public function. They also carry a heavy burden of proof.

LME’s nickel rout: does the 145-year metals exchange have a future?

If Jane Street and Elliott prevail, the case would move to a second damages phase. The two firms are seeking combined US$472 million in damages.

“In pressing and extraordinary circumstances, the LME at all times acted in accordance with its rules and regulatory obligations and in the interests of the market as a whole,” a bourse spokesperson said. “The LME will continue to vigorously defend its decision and decision-making process.”

“It is really no exaggeration to say this decision sent shock waves through the commodities markets here and elsewhere,” Elliott’s lawyer Monica Carss-Frisk argued during last month’s trial.

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.

The judicial review is the latest legal battle by Singer’s Elliott Management, which acts as manager for the Elliott funds.

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

Elliott Management famously chased the government of Argentina for more than decade over defaulted bonds, at one point convincing a Ghanaian court to briefly seize an Argentine military vessel in 2012 before settling the case four years later.

In hundreds of pages of court documents and over three days of legal arguments, the LME case has starkly laid out how decision makers at the bourse did not know the full extent of what was behind the spike in nickel prices and how they struggled to contain the ensuing chaos.

Nickel and other metals can essentially be traded 24 hours a day during the week between LME members and clients. However, most activity happens between 1am and about 8pm each day when its electronic trading and inter-office matching system are available.

On the morning of March 7, the price of nickel rose by 30 per cent in a little over six hours and “was very much the topic for the rest of the day”, Chamberlain said in a witness statement. Other metals traded on the LME, such as copper or zinc, “had not undergone anything close to that amount of change”, he said.

The price ultimately peaked at US$55,000 a metric tonne in afternoon trading, but Chamberlain and members of a special committee of the LME’s board of directors felt the market was orderly that day and there were geopolitical and macroeconomic reasons to explain the price moves, namely sanctions against Russia over its invasion of Ukraine 12 days earlier, Chamberlain said.

The bourse also updated the FCA and the UK Treasury on the situation that day, he said.

“We will see where we stand 0800-0900 tomorrow. If the nickel price has fallen overnight, we’ll be in a much better position,” Chamberlain said in a 9.36pm email to the FCA.

“If it continues to rise, we’ll need to consider how much further we will let it rise, before potentially intervening. We’ll also see where members are on their overnight margin calls (hopefully all will be paid, but for several members this is contingent on them receiving payment overnight from Asian clients).”

One of those traders facing significant margin calls was Tsingshan, the Fortune 500 company founded by Chinese billionaire Xiang Guangda, who is known in commodities circles as “Big Shot”.

In his testimony, Chamberlain said that he and other senior management first became aware of Tsingshan’s short position on Valentine’s Day when they read a news article discussing its holdings. However, they only had a view of its on-exchange position, which was “not particularly large”, rather than the full extent of its over-the-counter (OTC) positions, he said.

Chamberlain has blamed large off-exchange positions as a major driver of the nickel chaos last year and the bourse has moved to require reporting of those positions as part of a series of reforms.

“To be absolutely clear, when I took the decision, I was not aware of Tsingshan being in difficulty (or, indeed, that Tsingshan had any exposure to the nickel market over and above its on-exchange LME position), and no aspect of my decision-making was intended or motivated by a desire to favour or protect Tsingshan,” Chamberlain said in his witness statements.

Tsingshan secures bank lifelines after short on nickel goes wrong

It turned out Tsingshan’s position was significantly larger when its OTC holdings were factored in and trading was ultimately suspended for just over a week following the chaos until the Chinese company reached a standstill agreement with its banks over its margin calls.

The LME’s decision to cancel trades ultimately provided a “multibillion-dollar bailout” to Tsingshan, James Segan, a lawyer for Jane Street, said during last month’s trial.

Since the events of March of last year, Xiang has been far from a shrinking violet.

In November, Xiang took the stage at the Business 20 Summit in Bali, Indonesia, alongside the top executive of drug maker AstraZeneca in China and the US Chamber of Commerce’s then-head of international affairs, sharing his thoughts on global supply chains.

In May, the 65-year-old industrialist hosted Argentina’s Economy Minister Sergio Massa and his entourage at Tsingshan’s headquarters in Wenzhou in eastern Zhejiang province.

He also has reportedly exited most of his vast short positions that played a major role in last year’s nickel crisis, according to Bloomberg.

Another point of contention in the legal dispute is whether the LME’s senior management should have sought to identify the cause of the spike in nickel prices and consulted market participants before it moved to reset the trading day.

Those bands, which the LME said act as a control mechanism for “fat finger” errors or rogue algorithmic trading, were suspended that morning after several attempts to adjust them to keep pace with the rapid price increases proved ineffective.

“Even if I had known that the LMEselect price bands had been suspended at the time … this would not have changed my view about the disorderliness of the market or the appropriateness of the decision,” Chamberlain said in a witness statement.

Chamberlain said he determined the market was acting “disorderly” around 5.50am, or about 20 minutes after he woke up, and issued a notice to suspend trading of nickel at 8.15am after a series of WhatsApp discussions, emails and a conference call with senior executives at the LME, its clearing arm and the HKEX.

Following the decision to suspend trading, top management at the LME and its clearing arm discussed the next steps to take, ultimately determining the best course of action was to cancel trades that morning.

That would have depleted the LME’s emergency fund and forced the bourse to seek another US$220 million from non-defaulting members. As a result, another five members, or a dozen in total, would be pushed into default, Crow said.

“I was convinced that the prospect of multiple simultaneous defaults was a serious risk to market stability and, as such, I considered that trades at these price levels – which I strongly believed had only come about due to the disorderly market conditions on the morning of 8 March 2022 – if allowed to stand, posed an immediate and serious systemic risk to the market,” Chamberlain said in his witness statement.