UK regulator fines LME £9.2m for failures that led to nickel closure

The Financial Conduct Authority said on Thursday the enforcement action and £9.2m fine are the first imposed against a Recognised Investment Exchange.

The regulator said in its statement: “The LME’s systems and controls were not adequate to ensure orderly trading under conditions of severe market stress. In particular, LME did not have adequate controls or policies relating to the operation of its automatic volatility controls, its ‘price bands’.”

The FCA added: “Decisions about market orderliness could only be taken by designated senior managers, but LME’s processes for escalating unusual or hazardous market conditions to those managers were inadequate.”

The regulator said these inadequacies were exposed on March 8 when the LME nickel price more than doubled overnight, forcing the LME to close the market and rip-up trades.

The FCA said “only relatively junior trading operations staff” were on duty in the early hours of March 8 and the extreme price rises in the Asian trading hours were “not escalated to senior LME managers”.

The regulator said in its notice: “Instead, trading operations staff took steps to accommodate the price rises, even disabling the price bands, during the most extreme period of volatility.

“The LME’s breaches allowed the price of its three-month nickel futures contract to increase much more quickly than would otherwise have been possible. This increased the potential exposure of investors and market users to risks the price bands were designed to mitigate.”

The LME issued a statement on Thursday accepting the regulator’s conclusions. “The London Metal Exchange (LME) notes the FCA’s announcement today and 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.”

The LME has introduced since March 2022 many reforms including increased OTC position reporting to ensure against a repeat of the market conditions that ultimately led to the controversial nickel closure three years ago.

Separately, the British Supreme Court said on Thursday it has refused an application by Elliot Associates, a hedge fund, to appeal against the dismissal in October last year of Elliot's case against the LME for its decision to close the nickel market.