The London Metal Exchange has been fined £9.2m by the City watchdog for mishandling the nickel market chaos in 2022, marking the regulator’s first penalty against a top investment exchange.
The Financial Conduct Authority investigation showed that the LME was unprepared for the “serious risks” that emerged in March that year, when Russia’s invasion of Ukraine caused a surge in the price of nickel.
Prices more than doubled on 8 March 2022, to more than $100,000 a tonne, with most of the jump taking place in little over an hour.
The LME subsequently launched an eight-day suspension in trading and controversially cancelled all trades from the day of the surge, resulting in a lawsuit by the hedge fund Elliott Associates. That lawsuit was later dismissed in the courts. The LME has previously said the cancellations were essential to protecting the market and avoiding smaller members of the exchange going bust.
While the spike in prices was caused by uncertainty over the metal’s availability – following speculation that key Russian producers would face sanctions – the FCA said the LME failed to “ensure that its systems and controls were adequate to deal with severe market stress”.
It said the LME only put relatively junior trading staff on duty overnight during Asian trading hours, running from 1am to 7am GMT, and that those staff were not properly trained to recognise when and why markets would be reacting in such a disorderly way.
That meant that the extreme surge in nickel prices on 8 March 2022 was not escalated to senior managers. Instead, the junior trade staff took steps to accommodate the jump, going as far as disabling existing price bands that were part of its automatic controls during the most intense period of volatility.
“The LME’s breaches allowed the price of its three-month nickel futures contract to increase much more quickly than would otherwise have been possible,” the FCA said. “This increased the potential exposure of investors and market users to risks the price bands were designed to mitigate.”
Steve Smart, joint executive director of enforcement and market oversight at the FCA, added: “London’s metal markets are of vital importance to the UK and global economy. We expect controls that match their significance. The LME should have been better prepared to address the serious risks posed by extreme volatility.”
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The LME said it accepted the FCA findings, and had improved its controls to avoid similar problems.
Its chief executive, Matthew Chamberlain, said: “We take our responsibilities as a global market operator very seriously, and acknowledge that we could have provided a better line of defence to the effects of the disorder … which had spilled over on to the LME market in March 2022. The LME swiftly implemented market enhancements and we are pleased to be able to move forward, stronger as a result.”
