UK regulator launches probe into LME nickel trading halt

By Iain Withers and Eric Onstad

LONDON (Reuters) -A British financial watchdog on Friday launched its first ever investigation of a UK exchange for possible misconduct after the London Metal Exchange’s decision last year to halt nickel trading.

It was unclear, however, whether the probe would look at the exchange’s controversial decision to cancel billions of dollars of trades.

The world’s largest and oldest metals market annulled all nickel trades in March last year after chaotic price action and suspended trading for the first time since 1988.

The March 8 suspension occurred after prices doubled to more than $100,000 a tonne in a matter of hours in a surge sources blamed on short-covering by one of the world’s top producers.

The move has prompted investor lawsuits while the nickel contract remains broken with volumes sliding, leaving the industry without an effective global reference price.

A statement from the Financial Conduct Authority (FCA) said it had launched an “enforcement investigation” into the conduct and systems and controls that the LME had in place between Jan. 1 and the suspension of trade on March 8, 2022.

Two lawyers said it appeared the watchdog was limiting its probe to the decision to stop trading, and would not cover the more contentious one to cancel trades.

“It does look from the statement that the FCA is not going to look at the cancelled trades,” said a regulation lawyer who declined to be named.

The watchdog said it would not make any further comment about the investigation.

Its website says of enforcement investigations: “We will start an investigation where we have reason to believe serious misconduct may have taken place.”

This was the first such action the FCA has launched against an exchange, a spokesperson said.

“The FCA’s decision to open this investigation into an exchange is a bold step,” said James Alleyne, legal director at law firm Kingsley Napley.

“That the FCA has decided to investigate means it considers there are circumstances suggesting that LME may have committed serious misconduct. Such a finding would certainly have significant cost and reputational implications for the LME.”

The FCA did not give any timeline, but Alleyne said the case could take years to conclude.

ACTIVE STEPS

The 146-year-old LME said it had taken active steps to enhance nickel market liquidity and transparency, including 15% daily price limits and over-the-counter (OTC) position reporting for all physically delivered metals.

“The LME will cooperate fully with this process and will continue to take the appropriate steps to ensure the long-term health, efficiency and resilience of its market,” its statement added.

In its statement, the FCA acknowledged that the LME had committed to a wider package of market reform, adding that it was encouraged by the exchange’s focus on transparency.

The FCA and Bank of England (BoE) began a review last April into the trading halt by the LME, owned by Hong Kong Exchanges and Clearing.

On Friday, the BoE separately said its reviews had pointed to several shortcomings at LME clearing house LME Clear, adding that it would name an independent monitor to assess and report on its remedial actions.

“The dual-pronged approach of the FCA and the Bank represents a significant and possibly unprecedented development,” said Adam Topping, a commodities and financial regulation specialist at law firm Holman Fenwick Willan.

Topping added that it demonstrated how seriously they view any perceived compliance shortcomings.

In January, management consulting firm Oliver Wyman released an independent review of the nickel trading debacle, and the exchange said it would set out an implementation plan for the report’s recommendations by the end of March.

The nickel crisis, spurred partly by large OTC short nickel positions, shone a light on the failure of a core reform from the global financial crisis to help regulators quickly spot destabilising risks in markets.