Independent Report into LME Nickel Chaos Released

An independent review into the chaotic events on the LME’s Nickel market in March 2022 – which saw the exchange suspend all Nickel trading for a week, has, unsurprisingly perhaps, recommended stronger controls and more in-depth oversight to avoid a repetition.

In March, the LME suspended trading in Nickel after prices more than doubled as news of a large short position, which was going bad, spread through the market. Subsequently, two hedge funds have initiated legal action against LME and the Managed Funds Association published a letter of complaint about the exchange’s actions.

The independent review, conducted by Oliver Wyman, focuses on LME’s lack of knowledge of the large positions held in OTC markets as well as its lack of layers of defence. The introduction of layers of defence should, the report states, “improve the LME Group’s ability to identify, prevent and manage risks of market distortions [and] include measures that could support the rebuilding of confidence in the LME market”.

To better identify risks and prevent extreme events, the report also recommends LME extends the mandate of its risk and control functions to explicitly cover the identification and prevention of market distortions. It should also upgrade its capabilities accordingly. “LME rules and enforcement processes to prevent risks of market distortions should be tightened,” the report states. “One suggested measure is to adopt LME-specific position limits and to revamp the existing accountability level framework to help address risks created by large positions.

“Given the importance of the OTC market to the events, the LME should also monitor significant risks in the OTC market to manage the risks of LME market distortions,” it continues. “Measures could include requiring members to notify the LME when client positions reach set materiality thresholds, or when clients miss significant margin calls.”

LME should also upgrade volatility controls, the report finds, to slow down “extreme” price moves, this should include calibrating in more detail price limits instituted following any event and “improving communication around the state of the market”.

LME should also building operational processes with members to effectively manage client defaults on OTC as well as centrally cleared positions. More generically, and again unsurprisingly, the report says that LME should seek to rebuild confidence in the market following the events in March. “It should consider tightening rules to improve perceptions of member and LME Clear resilience, and provide a clear vision for how the LME will respond to events and rebuild liquidity,” the report states.

The Review did not cover the LME’s decision-making processes and governance arrangements, which are the subject of the regulatory reviews announced by the UK’s  Financial Conduct Authority and the Bank of England.

LME failed to maintain an orderly market, manage conflicts of interest, and protect investors in the nickel market and must institute controls so market participants can engage in these markets with confidence

In a response, LME says it will consider the recommendations “carefully” before moving to implementation phase, it also notes it has already taken “proactive” steps the reduce the likelihood of a similar event occurring again. “As the LME Group continues to build on these actions, it anticipates that implementing some of Oliver Wyman’s recommendations will involve longer term projects, including engagement and consultation with the market and regulators,” the exchange says in its response. “Notwithstanding this, there are a number of areas within the report in relation to which the LME Group has already been developing its thinking and the LME Group will continue to engage with the market on these topics.”

The exchange also says it will prepare an implementation plan to rebuild confidence in the market, this will set out how it proposes to deliver against the recommendations in the independent review.

The report was seized upon by MFA, which itself issued a statement stressing the need for an in-depth regulatory review. “The independent review has confirmed our concerns that the LME lacked the systems and controls to manage through the March 2022 nickel crisis, but it is essential that a robust regulatory review addresses how LME failed in its regulatory function,” Jennifer Han, head of global regulatory affairs at the association says in the statement. “LME failed to maintain an orderly market, manage conflicts of interest, and protect investors in the nickel market and must institute controls so market participants can engage in these markets with confidence.

“Alternative asset managers rely on sound markets to deliver reliable returns for institutional investors such as pensions, especially during times of market volatility,” she adds.