The LME’s Operation Fightback

In some financial circles, the London Metal Exchange’s reputation is on a par with that of estate agents, car salesmen and journalists.

That’s down to a fateful day in March when the price of nickel doubled in a few days to $100,000 a tonne in an epic short squeeze on Chinese metals tycoon Xiang Guangda, before the LME halted trading.

But it wasn’t the market closure that infuriated a lot of people. Instead it was the cancellation of nearly $4bn worth of trades, when the exchange realised the price would put many of its members in severe financial difficulty. Some missed out on a once-in-a-lifetime trade.

Cue outrage.

Now the exchange is going back to those users it either saved or mightily annoyed with a clean-up plan that once again may please some users but likely annoy another set of members. Here is the full proposal.

Some background: Back in March, one of the reasons the LME didn’t react earlier to the nickel squeeze was that it didn’t know just how much business was being done over-the-counter via swaps (with the price on the LME being used as a reference price).

When the banks who were the counterparties to the swaps ‘fessed up, it emerged the LME saw just one-fifth of the market.

The LME’s chief executive Matthew Chamberlain was due to quit for a crypto start-up, but has now done a U-turn and stayed as CEO (probably wisely given the absolute carnage in crypto lately), and feels he has a mandate for change.

The LME’s first move will try to ram through a plan for more regular reporting of over-the-counter positions in all physically-delivered metals, like aluminium, cobalt, copper, lead and yes, nickel.

As part of a big revamp last year, the LME had tried to introduce daily reporting to reduce “the potential for market squeezes on LME and related OTC markets.” The market rejected the idea because it was all too complex and costly. Quite.

It appears the LME has absorbed some lessons, however. Last year it pushed for daily reporting but now will accept weekly updates. There would be no minimum position size threshold. The positions would be filed on a template provided by the LME, thus closing off one of the avenues the market has used to skirt a post-2008 push on transparency in fixed income markets.

Regulators didn’t standardise publication of information, so the data that is public is simultaneously within the letter of the law and useless.

The exchange is giving the market just two weeks to respond to its proposal, far shorter than usual.

The LME’s urgent need to ensure that it has a clear understanding of activity that could impact on the orderly functioning of the LME’s metals markets, during the current period of global uncertainty and supply chain pressures. Further, in the interests of ensuring a level playing field between respondents to the consultation, the LME shall not consider responses submitted after the deadline.

It seems that Clifford Asness, one of the most vocal, colourful and amusing critics of the LME after his firm AQR lost out on a large windfall, isn’t convinced.

But even this change will need approval from its members and users. So far there’s been little detail from the banks as to how Guangda built up such a big position, nor why they did not close him out earlier when margin calls were surely due.

Reform of the OTC commodities market may be a hard challenge but the LME isn’t letting a good crisis go to waste.