A formal complaint has been made by the Managed Fund Association against the London Metal Exchange over its cancellation of nearly $4bn in nickel trades on 8 March.
In an 8 June letter to the LME, the hedge fund group — representing 150 hedge funds managing nearly $2.6tn in assets — said that “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”.
The MFA said the LME failed in its duties of maintaining an orderly market when it did not implement price limits before 8 March, and then retrospectively cancelled nickel trades.
“The LME was acting outside of its regulatory functions and contrary to its regulatory obligations to maintain an orderly market so as to afford proper protection to investors, as required by UK law,” the letter said.
READ LME boss defends cancelling nickel trades to stop ‘multiple defaults’
The letter goes on to say it “should have been evident” that nickel prices were extremely volatile and that the LME needed to apply price limits before nickel spiked to more than $100,000/tonne on 8 March.
“In failing to take timely action to apply effective price limits and no-cancellation ranges to nickel contracts, LME failed in its regulatory obligations,” the MFA said.
The association’s letter also argues that the cancellation of nickel trading was partly due to a conflict of interest with LME Clear, the clearinghouse for the exchange.
LME chief executive Matthew Chamberlain said during a Futures Industry Association event on 7 June that had the LME not cancelled trades “multiple defaults” could have occurred.
However, the MFA said that in cancelling trades, “a much broader range of market participants than the distressed participants were negatively impacted in terms of economic losses and/or lost profits”.
It went on to argue that managing clearinghouse risk is outside the scope of an exchange’s regulatory obligation.
“The inability of the distressed participants to satisfy margin calls made by the LME Clear – a Central Counterparty Clearing House – is a risk that should have sat squarely with LME Clear,” the MFA said.
Chamberlain, however, believes that the LME made the correct call that day in cancelling nickel trades.
“I’m confident that the decisions that we took were decisions we took in the interest of the whole market. I don’t feel that the decisions were designed to advantage one group or disadvantage another group,” Chamberlain said on 7 June.
In a statement, an LME spokesperson told Financial News: “We note the recent letter from the Managed Funds Association, which will be managed via the LME’s complaint procedures.
“We are committed to ensuring that the actions of all participants in respect of the nickel trading suspension (including the LME itself) are fully reviewed, which will include separate reviews by both the FCA and Bank of England, as well as an independent review commissioned by the LME – further details of which will follow later this month.”
They added: “At all times the LME, and LME Clear, sought to act in the interests of the market as a whole.”
To help rebuild trust and confidence in the exchange, the LME is conducting an independent review of the nickel crisis to determine where lessons could be learnt.
But re-establishing trust will be a big ask, according to Rebecca Healey, a market structure, regulatory reform and trading technology consultant.
“It’s about fundamental market principles – a trade is a trade. Once you fundamentally break that rule, it will fuel appetite for looking for alternatives. It may not happen tomorrow, but it’s just that the sapping of trust is very difficult to rebuild,” she said.
The MFA’s most recent letter is not the only complaint the organisation has levelled against the LME’s handling of the nickel crisis.
As part of the LME’s review, the exchange said it would look to strengthen reporting from market participants of over-the-counter contracts. The LME previously told Financial News that it was unaware of the level of short positions held by market participants due to low visibility of OTC trading.
But a letter dated 1 June from MFA said it had “significant reservations” about the LME’s attempts to bring more visibility to OTC contracts.
“Although LME believes that market visibility was a factor in the events which arose on its nickel markets, it would be premature for LME to proceed with its proposals prior to the fuller reviews of the UK regulators and of the LME,” the letter said.
“Those reviews are intended to consider a broader range of factors which may have contributed to the events, and which may also need addressing.”
The LME’s decision to cancel trades and suspend trading is under joint review by the Financial Conduct Authority, the Prudential Regulation Authority, and the Bank of England.
The MFA’s latest complaint adds to a string of highly publicised actions against the London-based metal exchange. On 6 June, Elliott Management began litigation against the metal exchange on the same grounds as the MFA letter. Elliott’s lawsuit was followed the day after on 7 June by Jane Street who also sued the LME for wiping nickel trades.
To contact the author of this story with feedback or news, email Jeremy Chan
