The London Metal Exchange fined £9.2m for failures during nickel market chaos

The London Metal Exchange (LME) has been issued a £9.2m fine by the Financial Conduct Authority (FCA) for its mishandling of the nickel market disruption in March 2022, marking the first such penalty levied against a leading investment exchange. The regulator found the LME unprepared to manage the severe risks that emerged as nickel prices soared during a period of intense market volatility triggered by Russia’s invasion of Ukraine.

On 8 March 2022, nickel prices more than doubled to an unprecedented level of over $100,000 a tonne, with a significant portion of the surge occurring within just one hour. This extreme volatility led the LME to suspend trading for eight days and controversially cancel all trades from that day. While this decision sparked a legal challenge from Elliott Associates, a hedge fund, the lawsuit was later dismissed by the courts. The LME defended the cancellations, citing the need to protect the market and prevent smaller members from collapsing.

The FCA’s investigation revealed that one key failure was the exchange’s reliance on relatively junior trading staff during Asian trading hours from 1am to 7am GMT. According to the findings, these staff were inadequately trained to recognise or respond to the disorderly market movements. As a result, they disabled existing price bands that were designed as automatic safeguards, allowing nickel price spikes to escalate unchecked instead of escalating the situation to senior management.

The regulator found that the LME’s lack of adequate controls amplified the risks faced by investors and market participants. It determined that the insufficient preparedness of the exchange contributed to adverse market consequences during a period of extraordinary stress. Steve Smart, executive director of enforcement and market oversight at the FCA, stated, “London’s metal markets are crucial to both the UK and global economy. We expect the controls in place to match the significance of their operations.”

In response, the LME acknowledged its shortcomings and accepted the FCA’s findings. The exchange’s chief executive, Matthew Chamberlain, stated, “We take our responsibilities as a global market operator very seriously. We recognise that our defences could have been stronger during the market disorder of March 2022. The LME has since implemented significant market enhancements and is now in a stronger position to ensure future resilience.”

The incident highlights both the risks and responsibilities associated with managing high-value commodity markets during times of crisis. With its actions under intense public and regulatory scrutiny, the LME’s reforms aim to restore confidence in its capability to handle market turbulence effectively.