Metals market faces scrutiny after nickel disorder

Following the recent turmoil in the nickel market, which saw the London Metal Exchange (LME) suspend trading for days, fundamental structural reforms are in the works.

In a joint statement, the U.K.’s Financial Conduct Authority (FCA), the Prudential Regulation Authority (PRA) and the Bank of England said they plan to undertake reviews of the LME; the central counterparty, LME Clear; and major firms in the nickel market after trading was suspended on March 8 amid disorderly market conditions.

The LME announced today that it has adopted measures designed to maintain orderly markets, including the imposition of upper and lower daily price limits, and enhanced reporting of over-the-counter (OTC) trading positions — and signalled that these could become permanent features.

While price controls haven’t historically been a feature of the market, “there is now broad support for retaining the daily price limits for the foreseeable future so as to provide clear known price boundaries for daily trading and minimize the potential for disorderly price moves,” the LME said today in a notice.

Additionally, the exchange said it needs reporting of OTC positions to help oversee the market.

“The exchange believes this to be vital for the appropriate monitoring of the nickel market, given the events in nickel were linked to the existence of large short positions on the OTC market, of which the LME had no visibility prior to [March 8],” it said.

Indeed, the exchange indicated that it intends to enhance its oversight of OTC trading generally.

“The recent events in the nickel market have demonstrated the potential impact that OTC trading can have on the wider LME market, and as such, the LME believes it should prioritize implementing OTC trade reporting for all LME metals,” it said. “In the longer term, the LME believes it should capture near-real time reporting of OTC trades.”

In the meantime, the LME is considering how to implement daily OTC reporting requirements.

In their joint statement, the regulators called on the LME and LME Clear to “remain vigilant” until the market dislocations are fully resolved, and signalled that further reforms to market structure can be expected.

Once the markets are fully stabilized, the FCA said it 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 terms of the exchange’s governance and market oversight arrangements.

Similarly, the central bank intends to review the operations of LME Clear for lessons learned. The FCA and the PRA will examine trading by firms that held significant positions in the nickel market to assess their risk management and governance arrangements.

The regulators said that the disruption “underlined questions” raised in a recent discussion paper published by the LME on market structure and transparency.

“The FCA has been in discussion with the LME on its proposals for some time and expects the LME to consider carefully how recent events should shape its future approach on market structure,” the FCA said.

In the meantime, the regulators noted that the LME has agreed to strengthen its governance by appointing more independent directors.

Any further reform recommendations from the FCA and the central bank will follow their reviews.

The exchange said it welcomes regulatory reviews, and pledged to commission an independent review of the events that led to the trading suspension to “identify any actions that could be taken to minimize the risk of a disorderly market arising in future.”

That review will involve a “full forensic review of trading” with an eye to both possible disciplinary action for any misconduct uncovered, along with market structure reform recommendations, the LME suggested.

“The events leading up to the suspension and resumption of nickel trading were unprecedented,” the exchange said. “The LME will remain vigilant and continue to review the situation and the environment to ensure market stability.”