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City watchdog launches enforcement probe into London Metal Exchange after embattled bourse's controversial nickel trading halt

• LME has been under pressure since suspending trading amid a short squeeze
• It faces hundreds of millions of dollars worth of lawsuits from investors
• The BoE will appoint a 'a skilled person' to monitor LME's progress 

By MIKE SHEEN FOR THIS IS MONEY 

PUBLISHED:  3 March 2023 |

The Financial Conduct Authority has launched an enforcement investigation into the London Metal Exchange's controversial decision to halt nickel trading early last year.

Chinese-owned LME faces hundreds of millions of dollars worth of lawsuits from investors like hedge fund giant Elliot Associates and Jane Street after it suddenly suspended trading and cancelled all trades of the metal on 8 March.

The City watchdog was scant on details when confirming the probe on Friday, but said it would cover 'some of the LME's conduct and systems and controls in place in the period between 1 January 2022 and the time of suspension on 8 March 2022'.

The LME's 'the Ring' is one of the few open-outcry trading floors still operating   

It added: 'The FCA has confirmed an investigation in light of the public interest in these matters and will not make any further comment in line with normal policy'.

LME came under fire when a giant short squeeze resulted in the closure of the market for a week and the cancellation of billions of dollars worth of trades.

The decision to cancel the trades caused uproar among investors, and left the 146-year-old LME's credibility in tatters. Senior management was lambasted for its handling of the crisis.

Its chair Gay Huey Evans, who became the first woman to chair the LME in 2019, recently said she would not seek re-election this year.

In April last year, the FCA, Prudential Regulation Authority and Bank of England issued a joint statement promising 'reviews' of LME's operations.

LME itself appointed management consultants Oliver Wyman to carry out a review of the nickel trading debacle last June.

On Friday, the FCA said: 'Since the suspension the FCA has made clear its expectation that the LME should consider carefully how the events of March 2022 should shape its future approach on market structure, including the role of transparency in facilitating effective risk management.

'The LME has implemented changes to its control framework and committed to a wider package of market reform, informed by the recommendations of an external review LME and LME Clear jointly commissioned.

'The FCA is encouraged by the LME's focus on increasing the transparency of OTC [over the counter] trading to support robust risk management in its on-exchange trading.

'The oversight exercised by the LME Board to drive the effective and timely execution of this programme is being monitored closely by the FCA. The proposed changes to the LME Board will enlarge the skills and experience available to it. The FCA will also work closely with the Bank of England as the programme progresses.'

In response to the FCA, LME chief executive Matthew Chamberlain said: 'The LME notes that the FCA has opened an enforcement investigation into some of the LME's conduct and systems and controls in place during the period between 1 January 2022 and the time of suspension on 8 March 2022.

'The LME will cooperate fully with this process and will continue to take the appropriate steps to ensure the long-term health, efficiency and resilience of its market.'

In a separate statement the BoE, which is responsible for regulating LME's clearing house, said its own reviews had 'pointed to several shortcomings across LME Clear's governance, management and risk management capabilities'.

It added: 'In response, LME Clear will need to strengthen its governance arrangements, increase independence in management and governance at the CCP, and improve on its wider risk management.

'The Bank expects LME Clear to appropriately address all of the findings from the reviews and welcomes LME Clear's stated commitment to the publication of its implementation plan and timely execution thereafter, which the Bank will monitor closely.'

The BoE added that it intends to appoint 'a skilled person' to 'to independently monitor, assess and report to the Bank regularly on LME Clear's implementation progress against remedial actions'.

In response to the BoE, Mr Chamberlain said the group 'acknowledges that the Bank expects LMEC to strengthen its governance arrangements, increase independence in management and governance at the CCP, and improve on its wider risk management capabilities'.

He added: 'To this end, LMEC intends to incorporate all additional findings from the Bank's feedback into the implementation plan that LMEC has already announced.

'This is to be communicated at the end of Q1 2023, setting out how LMEC proposes to deliver against the recommendations of the Oliver Wyman review, and outlining, in addition, the initiatives that are already underway to strengthen its business and markets.

'LMEC welcomes the Bank's intention to appoint a skilled person with respect to the implementation progress, and will continue to take the appropriate steps to support the long-term health, efficiency and resilience of the market as a whole.'