FCA, Bank of England launch probe into LME nickel market

The Financial Conduct Authority and the Bank of England's Prudential Regulation Authority, or PRA, have launched a probe into the London Metals Exchange nickel market after the March 8 suspension, the authorities said in a joint statement April 4.

The financial regulation authorities said that, while they had been focused on the orderly resumption of nickel trading, they expected the LME and LME Clear to remain vigilant now that trading had resumed until the situation was fully resolved.

"After a period of stability, the FCA intends to review the LME's approach to managing the suspension and resumption of the market in nickel to determine what lessons might be learned in relation to the LME's governance and market oversight arrangements," the authorities said in the statement.

The Bank also plans to carry out a similar review into the operation of LME Clear to see whether any governance and risk management lessons could be learned.

The outcome of the reports and subsequent reports will be considered by both entities to determine whether they should take further action, and they said they would announce next steps in due course.

"The PRA and FCA will also be engaging further, through their supervisory processes, with firms who held significant positions in the market to assess the effectiveness of their risk management and governance during the period," they said.

The LME suspended trading on March 8 after the LME three-month spot nickel price reached an all-time high of $101,365/mt in early trading, after closing at $48,078/mt March 7. It had dropped back to $80,000/mt as of 0815 GMT on March 8 when the suspension took effect, although all trades after 0000 GMT on March 8 were then canceled.

At the time, the LME attributed the high prices to a widely reported large short positions combined with geopolitical news flow and an environment of low metal stocks.

Trading resumed on March 16 with a preset daily limit of 5%, of which the lower limit was hit early on in trading. The limit was then increased to 8% from March 17, 12% from March 18 and 15% from March 21, although the lower end was hit on each of these days. Trading has been normal since March 25, within the 15% daily limit range, albeit at low volumes.

The LME three-month spot nickel price was trading at $33,300/mt at 0857 GMT April 4, up just 0.2% from the April 1 close, but up 57.7% from the start of the 2022.

The FCA and PRA also called for the LME to consider carefully how recent events should shape its future approach on market structure, as the events surrounding the nickel trading suspension and resumption had "underlined questions raised in a recent LME Discussion Paper on Market Structure, particularly the role of transparency in the LME and related markets."

The FCA had already been in discussion with the LME on its proposals for some time, they added.

Additionally, they said the LME had agreed it would be beneficial to appoint additional independent directors to strengthen its governance and will now review the best way to achieve this in the context of the skills and composition of its board.

LME to commission independent review

In a separate release, the LME Group welcomed the announcement of the FCA and PRA's review, saying it believed it was important that the LME and LME Clear's actions in responding to the nickel market situation were properly scrutinized and to learn lessons.

In addition, the LME will also be commissioning an independent review by an experienced independent party of the broader events in the nickel market that lead up to the suspension and identify any actions that could be taken to minimize the risk of disorderly market activity in the future.

"The LME Group intends to confirm the appointment of the independent party, together with the full scope of the Independent Review, in an announcement to the market as soon as practicable," it said, with the timeline also to be established after consultation.

The review will broadly look at conducting a full forensic review of trading and position activity in the nickel market, including over the counter trading over the relevant period, assessing proposals for market reform and long-term volatility control mechanisms, and considering a more stringent position management regime and additional market reform recommendations from market stakeholders.

"The LME Group wishes to acknowledge the impact of recent events on many stakeholders," the LME said, adding that it believed the reviews would all "support the long-term health, efficiency and resilience of the market and all its constituents."