FCA fines LME £9.2 million for failings during nickel crisis
The fine is the first enforcement action the FCA has ever taken against a UK exchange
[LONDON] The Financial Conduct Authority fined the London Metal Exchange £9.2 million (S$15.9 million) for having inadequate systems and controls to deal with a massive short squeeze in the nickel market in 2022.
The fine is the first enforcement action the FCA has ever taken against a UK exchange. The LME’s actions in 2022 – when it cancelled billions of dollars in nickel trades after prices more than tripled in a few hours of trading – have been the focus of legal action from numerous aggrieved investors, although UK courts have ruled that it acted lawfully.
The exchange sparked widespread fury by retroactively cancelling US$12 billion of trades booked as prices spiked, arguing that allowing them to stand would have led to the bankruptcy of numerous clearing members and trigger a “death spiral” through the market.
“The LME’s systems and controls were not adequate to ensure orderly trading under conditions of severe market stress,” the FCA said in a statement on Thursday (Mar 20). “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 UK regulator’s censure focused on shortcomings in the LME’s automated volatility controls, known as price bands. The circuit-breakers are designed to stop prices from rising or falling too quickly, but the LME’s trading operations team disabled the systems to accommodate the spike in prices that took place in early trading on March 8, according to the FCA.
“The LME’s breaches allowed the price of its 3-month nickel futures contract to increase much more quickly than would otherwise have been possible,” the FCA said. “This increased the potential exposure of investors and market users to risks the price bands were designed to mitigate.”
The LME accepted the findings and so qualified for a 30 per cent reduction in its financial penalty.
The exchange and the regulator have done “significant work” since the crisis that has “materially reduced the risks of such an event from occurring again,” the LME said in a statement. BLOOMBERG
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