City watchdog launches law enforcement inquiry into London metals exchange after controversial halt to beleaguered exchange’s nickel trading
- LME has been under pressure since suspending trading in a short time
- He faces hundreds of millions of dollars in lawsuits from investors
- BoE to appoint ‘qualified person’ to monitor LME progress
The Financial Conduct Authority has launched an investigation into the London Metal Exchange’s controversial decision to halt nickel trading early last year.
Chinese company LME is facing hundreds of millions of dollars in legal action from investors including hedge fund giant Elliot Associates and Jane Street after it suddenly suspended trading and canceled all trades in the metal on 8 March.
The city watchdog did not provide details when confirming the investigation on Friday, but said it would cover “some of the LME’s conduct, systems and controls in place between 1 January 2022 and the time of suspension on March 8, 2022”.
The LME “Ring” is one of the few open auction floors still in operation
He added: “The FCA has confirmed an investigation in light of the public interest in these matters and will make no further comment in accordance with normal policy.”
LME came under fire when a giant squeeze shut the market for a week and canceled billions of dollars in trades.
The decision to call off the deals caused an uproar among investors and left the credibility of the 146-year-old LME in tatters. Senior management has been 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 run again this year.
In April last year, the FCA, the Prudential Regulation Authority and the Bank of England issued a joint statement promising “reviews” of LME operations.
The LME itself commissioned management consultants Oliver Wyman to conduct a review of the nickel trading debacle last June.
The FCA said on Friday: ‘Since the suspension, the FCA has made it clear that it expects the LME to carefully consider how the events of March 2022 should shape its future approach to market structure, including understood the role of transparency in facilitating effective risk management.
“The LME has implemented changes to its supervisory framework and embarked on a broader set of market reforms, informed by the recommendations of a jointly commissioned LME and LME Clear external review.
“The FCA is encouraged by the LME’s focus on increasing OTC transparency [over the counter] trading to support sound risk management in its exchange trading.
“The oversight exercised by the LME Board to ensure the efficient and timely execution of this program is closely monitored by the FCA. Proposed changes to the LME Board will broaden the skills and experience available to it. FCA will also work closely with the Bank of England as the program 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 behaviors, systems and controls in place during the period between January 1, 2022 and the time of suspension on March 8, 2022.
“The LME will fully cooperate with this process and continue to take 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 “highlighted several gaps in LME’s governance, management and risk management capabilities. Clear”.
He added: “In response, LME Clear will need to strengthen its governance arrangements, increase the independence of management and governance at CCP and improve its broader risk management.
“The Bank expects LME Clear to respond appropriately to all findings of the reviews and welcomes LME Clear’s stated commitment to the publication of its implementation plan and its timely execution by the sequel, which the Bank will be watching closely.”
The BoE added that it intended to appoint “a qualified person” to “monitor, assess and report regularly to the Bank independently on the progress of the implementation of LME Clear against corrective actions”.
In response to the BoE, Mr Chamberlain said the group “recognizes that the Bank expects LMEC to strengthen its governance arrangements, increase the independence of management and governance at the CCP and improve its capabilities more broad risk management”.
He added, “To this end, LMEC intends to incorporate any additional findings from the Bank’s comments into the implementation plan that LMEC has already announced.
“This is due to be communicated at the end of the first quarter of 2023, outlining how LMEC proposes to meet the recommendations of the Oliver Wyman review, and further outlining initiatives already underway to strengthen its business and markets.
“LMEC welcomes the Bank’s intention to appoint a Qualified Person with respect to implementation progress and will continue to take appropriate steps to support the long-term health, efficiency and resilience of the market. in its entirety.”