Analysis: Nickel smelting highlights LME’s research powers


LONDON, Sept 5 (Reuters) – Stung by an epic crisis in nickel trading, the London Metal Exchange is introducing new rules to boost transparency.

From Monday, members of the world’s oldest and largest venue for buying and selling industrial metals will be required to provide the exchange with weekly reports of their over-the-counter (OTC) transactions – bilateral agreements between members and clients. Read more

The LME said a lack of visibility into the volume of business being done in over-the-counter transactions was behind the turmoil that unfolded in March when the price of nickel jumped nearly 270% over two days, prompting the exchange to halt trading and write off billions of dollars. of offers.

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But could the LME have used its own rules to get more information?

There were signs, in the weeks leading up to the market crash, of a major lower price bet, known as a “short,” on the price of nickel, according to the company’s own data release. the LME.

These trades are often just the tip of a much larger pyramid of over-the-counter trades and seven metals trading sources say the size of the position on the exchange should have raised alarm bells about the risk of disorder. of the market.

“The LME’s job is to run an orderly market. There were very strong indications heading into the crisis in March that there was a significant short position there,” the Bank of AmericaMichael Widmer.

“The LME should have been alert to any issues, especially since there were indications in the public space that there was a problem.”

LME rules give it the right to ask its members and their brokers for details of “any activity” in metals, including “over-the-counter” activities in the trading, storage or metal financing”.

In a public statement on October 9, 2020, the LME said it would only use these powers when strictly necessary, such as an investigation into suspected market abuse or other possible breaches of its rules.

The LME did not define these violations in its October 2020 statement, but according to its rules, the creation, whether intentional or not, of a disorderly market is prohibited.

Two regulatory lawyers said that under those rules, the exchange could have found out which LME members and which of their clients had exposure to the nickel market and ordered them to reduce or cut their positions altogether.

They declined to be named because they were not authorized to speak to the media.

“The settlement gives the LME broad powers to request information relating to commercial matters, regulatory compliance and market conduct matters,” said Adam Topping, a commodity and financial regulation partner at Holman Fenwick Willan.

“This includes information relating to OTC as well as exchange activity. In most cases, this should provide them with a wide range of relevant information when investigating potential disorderly trading conditions. .”

When asked why the LME did not search for OTC data, the exchange said its ability to do so was limited.

“Use of these powers is limited and requires a relatively high bar of proof first,” the LME said in an emailed response.

Hong Kong Exchanges & Clearing (0388.HK), owner of the LME since 2012, referred requests for comment to the London Stock Exchange.

The collapse of the exchanges has drawn strong criticism. Two major financial players are suing the LME for almost half a billion dollars over its decision to call off the deals and UK financial regulators are looking into the market meltdown.

The LME said it welcomed the reviews and appointed management consultants to conduct a separate independent study. It tried last year to introduce reporting requirements for OTC transactions, but some members opposed the move and it was dropped.

The LME is resisting lawsuits from US hedge fund Elliott Associates and Jane Street Global Trading, saying unprecedented market conditions caused a “messy” market and that it wanted to protect stability and integrity and avoid multiple defaults.

Elliott and Jane Street declined to comment.


At the heart of the hypersonic move in the nickel market was Chinese tycoon Xiang Guangda, who was betting big that the price of nickel would plummet but was largely doing so in the OTC market, according to three of the metal trading sources.

Xiang has not publicly commented on the transaction, which was done through his Tsingshan Holding group and has been widely reported. Tsingshan declined to comment for this story.

The LME’s own stock market data collected daily and released with a one-day lag showed a company holding 20-29% open interest – the number of outstanding contracts set to expire or roll over next settlement date – from the beginning of February on the nickel market.

On March 4, the negative bet had risen to 30-39% open interest.

The rise in price has put traders betting on a decline in dire financial straits, forcing them to buy the asset to cover any losses. Market rivals may drive up prices in anticipation of such purchases. The situation is known as a short squeeze.

As early as February 18, a note from Kingdom Futures, a metals broker, noted that nickel prices were rising “in what appears to be an attempt to flush out what is believed to be a large short position held by a Chinese client.”

As the price rose, the losses suffered by Tsingshan and other “shorts” increased, while the funds and traders on the other side of this position amassed large profits.

The LME, which had been criticized for allowing the market to open on March 8, abruptly suspended trading and canceled trades.

When asked why the LME did not inquire about Tsingshan’s OTC positions and ordered them to be sold, the exchange said the situation in March did not meet the required criteria.

“The LME has previously committed that these powers will be relatively limited in their application and will be used primarily in circumstances where the LME has serious and reasonable grounds to suspect that market abuse may be occurring or happened on his account. market.”

There was no suggestion of deliberate market abuse in the nickel market collapse and the LME’s own reference to “other possible breaches” of its rules in its October 9, 2020 statement gives it great leeway to search, the lawyers said.

“‘Possible rule violations’ seem to cast a wide net in terms of potentially relevant information they might seek to access,” Topping said.

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Reporting by Pratima Desai; edited by Carmel Crimmins

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