FCA fines London Metal Exchange £9.2m over 2022 nickel volatility
The Financial Conduct Authority handed a landmark £9.2m fine to the London Metal Exchange after it failed to prevent extreme volatility in the nickel market in March 2022.
In its first ever enforcement action against an investment exchange, the FCA criticised the exchange’s systems and controls that did not ensure “orderly trading under conditions of severe market stress”.
The London Metal Exchange decided to scrap billions in nickel trades in March 2022, after fears around the Russian invasion of Ukraine sent metal prices rocketing.
Prices more than doubled during the morning of 8 March 2022 to over $100,000 (£77,000), with most of the rise occurring in just an hour.
“These events undermined the orderliness of and confidence in the London Metal Exchange’s market,” said the watchdog, adding that the exchange’s processes for escalating unusual or hazardous market conditions to managers “were inadequate”.
During the exchange’s Asian trading hours, from 1am to 7am in the UK, only “relatively junior trading operations staff” were on duty, the FCA said, who had not been trained to recognise all potential causes of a disorderly market.
“This meant that when price rises in the nickel contract became increasingly extreme during the early hours of 8 March, it was not escalated to senior LME managers,” it added.
Instead, trading operations staff at the exchange actually worked to accommodate the price rises, including through disabling the price bands during the most extreme period of volatility.
Following the market’s morning session, the exchange suspended nickel trading for eight days and later published a notice cancelling all nickel trades entered into on that day before the suspension.
In total, the London Metal Exchange will pay a £9.2m fine to the FCA, after agreeing to resolve the case at an early stage and receiving a 30 per cent discount on the penalty imposed.
The FCA announced the investigation into the London Metal Exchange in March 2023, meaning the investigation was delivered “significantly quicker than the average length for investigations,” the watchdog said.
“London’s metal markets are of vital importance to the UK and global economy. We expect controls that match their significance,” said Steve Smart, joint executive director of enforcement and market oversight at the FCA.
“The LME should have been better prepared to address the serious risks posed by extreme volatility.”
Commenting on the fine, the London Metal Exchange said: “[The LME] acknowledges the findings in respect of its systems and controls. It accepts that, in March 2022, once the effects of large over-the-counter (OTC) positions had spilled over onto the LME’s nickel market, the LME price rose more quickly than would have been the case if certain LME systems and controls had acted as a better line of defence to the effects on the LME’s market of the OTC disorder.”
Matthew Chamberlain, LME chief executive, commented: “We take our responsibilities as a global market operator very seriously, and acknowledge that we could have provided a better line of defence to the effects of the disorder in the OTC market, which had spilled over onto the LME market in March 2022. The LME swiftly implemented market enhancements and we are pleased to be able to move forward, stronger as a result. In parallel we fully recognise the important work the FCA continues to undertake in strengthening oversight of the OTC market.”
Last year, a judge dismissed legal proceedings from activist investor Elliott Investment Management against the London Metal Exchange, after the group argued that the nickel trade cancellations caused lost profits totalling about $456m.
Trading firm Jane Street also brought a $15m damages case, which was also thrown out.