The lobby group for the world’s largest hedge funds has made a formal complaint to the London Metal Exchange, alleging the market operator failed to perform its regulatory functions when it cancelled thousands of nickel trades in March.
The Managed Funds Association, which represents investors such as DE Shaw, Renaissance Technologies and Third Point, filed the letter three months after the LME provoked uproar among some users for cancelling eight hours’ worth of activity in its nickel market.
The MFA complaint follows calls this week for a judicial review into the cancellations filed by both US activist group Elliott Management and market maker Jane Street, who are seeking $456mn and $15mn respectively in damages.
The LME stepped in to halt a squeeze on a short seller, which forced the price of the metal up 250 per cent in just a couple of days to $100,000 a tonne. It was necessary because the market had become “disorderly”, the exchange said in response.
The MFA complaint alleged the LME was acting outside of its legal obligations to maintain an orderly market. It ought to have acted the day before when it “should have been evident to the LME from the extreme fluctuations in the price of nickel . . . that [its] market was becoming disorderly”, it said.
It also expressed concern that the exchange was seeking to protect its clearing house, LME Clear, and said the relationship between the two was not fully covered by the scope of an independent review. The LME is due to appoint a consultant to lead the review in the coming weeks.
“The LME has undermined confidence in its ability to oversee markets by failing to perform its regulatory obligations to maintain an orderly market, manage conflicts of interest and protect investors in the nickel market,” said Jennifer Han, chief counsel at the MFA. She urged the LME to take “swift action” to address its shortcomings.
The LME said the letter would be handled by its complaint department. The exchange and its clearing house sought to act in the interests of the market as a whole at all times, it added.
At the time the LME feared many users would have faced severe financial difficulty and defaulted on margin calls if it had let the trades stand. Every day its clearing house asks users for margin, as insurance to keep trades open on the market.
When nickel closed at $48,000 a tonne the previous day, LME Clear had called for a record $7bn in margin, according to regulatory filings. The previous record day was a demand for $1.8bn.
The trades of March 8 were erased to take the market back “to the last point in time at which the LME could be confident that the market was operating in an orderly way”, it added on Wednesday.