The verdict is now out following an investigation into the controversial decision taken by the London Metal Exchange (LME) in March last year to suspend nickel trading for more than a week. The exchange has agreed to extended monitoring by the Bank of England (BoE) and to take additional steps to improve its governance.
The controversy happened on 8 March last year when the price of nickel went up by 250 percent in a little more than 24 hours. The unprecedented spike was partly due to fears of sanctions against Russia following its invasion of Ukraine on 24 February – the country exports about five percent of the world’s supply of the metal.
LME responded by cancelling $3.9 billion in nickel trades and shutting down nickel trading between 8 and 16 March, a move that caused chaos among metal traders.
“Skilled person” on the case
The investigation carried out by the BoE was conducted with the assistance of a “skilled person”, as required by Section 6 of the Financial Services and Markets Act 2000. Research and consultancy firm Oliver Wyman was also appointed to execute an independent review of the conditions that led to the catastrophic events in the nickel market last year.
The findings of the investigation concluded that LME had several shortcomings across its governance, management and risk management capabilities. The exchange has thus been requested to improve its governance arrangements, raise levels of independence and management standards at the central counterparty, and to strengthen its risk management framework.
LME has announced an implementation plan based on the results of the investigation. The BoE will be appointing a skilled person to monitor and regularly report on the progress that has been made on the plan by LME Clear, the exchange’s clearing house.
Seeks to make OTC market more transparent
The exchange has already taken some active steps towards enhancing nickel market liquidity, the most notable of which is the resumption of Asian nickel trading hours on 20 March 2023. It has also pledged to continue improving over-the-counter (OTC) market transparency in order to support better risk management in its on-exchange trading.
This isn’t the end of a difficult lesson for LME; the Financial Conduct Authority (FCA) is still running an enforcement investigation into LME’s conduct, as well as the systems and controls that were in place between 1 January 2022 and 8 March 2022. The LME has announced its intention to cooperate fully with this investigation.