06.07.2022

LME CEO Defends Cancellation of Nickel Contracts

06.07.2022
Shanny Basar
CME Expands Metals Suite

Matthew Chamberlain, chief executive of LME, defended cancelling trades in nickel contracts in March despite lawsuits being filed against the London metal exchange’s decision.

The LME CEO spoke to Walt Lukken, president and chief executive of FIA, at the IDX conference hosted by the trade organization for futures, options and centrally cleared derivatives in London on 7 June.

Chamberlain said: “We fully understand the impact that these incidents have had on a broad spectrum of participants. I wouldn’t be sitting here unless I can put my hand on my heart and say we believe that the decisions that we made are in the interest of the market.”

On 8 March 2022 LME retrospectively cancelled trades made in nickel contracts because it claimed that the market had become disorderly and it needed to act in the interests of the market as a whole. Hedge fund Elliott Associates and market maker Jane Street Global Trading have filed suits in court claiming this decision was unlawful. Elliott Associates has claimed damages of $456m and Jane Street has claimed $15.3m.

Hong Kong Exchanges and Clearing Limited, the owner of LME, said in a statement about each claim: “The LME management is of the view that the claim is without merit and the LME will contest it vigorously.”

Chamberlain is confident that the decisions taken by the LME were in the interest of the whole market. He added: “I don’t feel they were decisions that were designed to advantage one group or disadvantage another group.”

He reiterated that the decision to cancel trades was made by LME and LME Clear, despite speculation that it was influenced by HKEx due to the impact of the trades on a Chinese counterparty.

Chronology

The price of nickel rose 17% in the first week after the Russian invasion of Ukraine. On Monday 7 March 2022 the nickel price rose significantly again but Chamberlain said the LME considered that the market was behaving in an orderly manner. The following day in the early hours of trading in London, nickel prices increased dramatically over a short period of time. LME suspended trading in all nickel contracts with effect from 08:15 UK time and decided to cancel all trades executed on or after 00:00 UK time on 8 March 2022.

“The reason for that was to take the market back to the last position where it was orderly,” added Chamberlain. “I understand the impact and I fully acknowledge that there are a number of people who do not agree with that decision. I think it’s important to say that from LME’s perspective that we were concerned about a very significant systemic impact, particularly around a margin call that was unprecedented in the history of the LME.”

He argued that the LME had very significant concerns about the ability of market participants to meet those margins and that multiple defaults would have a very significant impact on the ability of the market to allow people to trade and manage risk.

Chamberlain said: “We’ve been through a difficult incident and building back trust is a top priority.”

Since the incident the LME has introduced new daily limits on price movements and has just closed a consultation on giving the exchange power to regularly see details of clients’ over-the-counter positions, which was rejected in a previous consultation in 2020.

“We think it would be hugely valuable for us to be able to look at a holistic picture of exchange-traded and OTC positions,” said Chamberlain.

The Bank of England and the UK Financial Conduct Authority will also be carrying out regulatory reviews of the LME’s actions, and the exchange itself is commissioning an independent review looking at market structure.

“We absolutely welcome the regulators because we think it is important that the reviews take place,” added Chamberlain.

The independent review will be looking at the exchange’s volatility control mechanisms, the mechanisms used by other exchanges and the monitoring of position across both exchange-traded and OTC markets. There are concerns in the industry about revealing proprietary OTC data and Chamberlain said the exchange has proposed safeguards in its consultation on how the data will be used. The exchange is also upgrading its trading platform, which should be ready in 2023, and will provide more functionality around volatility controls.

“The key to building that trust is to say we  have to make change and we will be judged on our willingness to embrace feedback,” he said.

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