Matthew Chamberlain, chief executive of LME, defended the cancellation of trades in nickel contracts in March despite legal action against the decision by the London Metal Exchange.
CEO of LME talked to Walt Lukken, FIA President and CEO, at the IDX conference hosted by the trade organization for centrally cleared futures, options and derivatives in London on June 7.
Chamberlain said: “We fully understand the impact these incidents have had on a wide range of participants. I wouldn’t be sitting here unless I could lay my hands on my heart and say that we believe the decisions we’ve made are in the best interests of the market.
— FIAconnect (@FIAconnect) June 7, 2022
On March 8, 2022, LME retrospectively canceled trades made in nickel contracts because it claimed the market had become disorderly and it needed to act in the interest of the market as a whole. Hedge funds Elliott Associates and market maker Jump Street Global Trading filed lawsuits in court, claiming the move was illegal. Elliott Associates sought damages of $456 million and Jump Trading sought $15.3 million.
Hong Kong Exchanges and Clearing Limited, the owner of LME, said in a statement about each claim: “LME’s management is of the opinion that the claim is without merit and LME will vigorously contest it.”
Chamberlain is convinced that the decisions taken by the LME were in the interest of the whole market. He added: “I don’t think these are decisions designed to benefit one group or disadvantage another group.”
He reiterated that the decision to cancel the trades was made by LME and LME Clear, despite speculation that it was influenced by HKEx due to the impact of the trades on a Chinese counterparty.
The price of nickel rose 17% in the first week after the Russian invasion of Ukraine. On Monday, March 7, 2022, the price of nickel rose significantly again, but Chamberlain said the LME considers the market to be behaving in an orderly fashion. The next day, in the early hours of trading in London, nickel prices rose dramatically for a short period. LME has suspended trading in all nickel contracts from 08:15 a.m. UK time and has decided to cancel all trades executed at or after 00:00 a.m. UK time on March 8, 2022.
“The reason for this was to bring the market back to the last position it was ordered,” Chamberlain added. “I understand the impact and fully recognize that there are a number of people who disagree with this decision. I think it is important to say that from the LME’s perspective we were concerned about a very significant systemic impact, in particular around a margin call unprecedented in the history of the LME.
He argued that the LME had very significant concerns about the ability of market participants to meet these margins and that multiple defaults would have a very significant impact on the market’s ability to allow people to trade and manage risk. .
— Les Male (@lesmale) June 7, 2022
Chamberlain said: “We have come through a difficult incident and restoring trust is a top priority.”
Since the incident, the LME has introduced new daily limits on price movements and has just closed a consultation on giving the exchange the power to regularly view details of clients’ OTC positions, which had was rejected in a previous consultation in 2020.
“We think it would be extremely useful for us to be able to look at an aggregate picture of exchange-traded and over-the-counter positions,” Chamberlain said.
The Bank of England and the UK’s Financial Conduct Authority will also conduct regulatory reviews of LME shares, and the exchange itself commissions an independent review of market structure.
“We absolutely welcome regulators because we think it’s important that the reviews take place,” Chamberlain added.
The independent review will examine the exchange’s volatility controls, mechanisms used by other exchanges, and position monitoring in exchange-traded and over-the-counter markets. The industry is concerned about the release of proprietary OTC data and Chamberlain said the exchange offered safeguards in its consultation on how the data will be used. The exchange is also upgrading its trading platform, which should be ready in 2023, and will provide more functionality around volatility controls.
“The key to building that trust is saying that we need to make changes and we will be judged on our willingness to accept feedback,” he said.