LME Faces Regulatory Reviews and Internal Reforms After Nickel Market Turmoil

Regulatory Oversight and Market Reforms

While the London Metal Exchange (LME) had focused on the orderly recommencement of nickel trading, authorities expect both the LME and LME Clear to act prudently until the market stabilizes fully.

“Following a period of stability, the FCA proposes to conduct a review of the LME’s practices and procedures to manage the suspension and resumption of the market in nickel and to explore what lessons might be learned about LME’s governance and market oversight arrangements,” the authorities said.

The Bank of England will also conduct a similar review into the operation of LME Clear, assessing if any governance and risk management lessons can be drawn from recent events. Both reviews aim to determine potential next steps and will be shared in due course.

The FCA and PRA stated: “The PRA and FCA will also be engaging further, through their supervisory processes, with firms that had large positions in the market to assess the effectiveness of firms’ risk management and governance over the period.”

Nickel Market Volatility and Trading Suspension

Nickel trading was suspended on March 8 after the LME three-month spot nickel price hit an all-time high of $101,365/mt during early trading—up from a close of $48,078/mt on March 7. The suspension was triggered at 0815 GMT on March 8 when prices fell back to $80,000/mt. All trades after 0000 GMT on March 8 were annulled.

The LME attributed the price spike to a combination of a widely reported large short position, geopolitical tensions, and low metal stock levels.

Trading resumed on March 16 with a 5% daily limit, which was repeatedly hit. The cap increased gradually—8% on March 17, 12% on March 18, and 15% on March 21. Despite low trading volumes, trading normalized within the 15% limit by March 25.

As of 0857 GMT on April 4, the LME three-month spot nickel price stood at $33,300/mt—up 0.2% from April 1 but up 57.7% since the start of 2022.

Focus on Governance and Transparency

The FCA and PRA urged the LME to reflect on the events and their implications for future market structure, reiterating transparency concerns raised in the LME’s recent Discussion Paper on Market Structure. The regulators also encouraged the LME to appoint more independent directors to strengthen its governance framework.

Independent Review Commissioned

The LME Group welcomed the regulators' review, affirming the need for scrutiny and a commitment to learning from the situation. It will also launch an independent review of the broader nickel market events leading up to the suspension.

“The LME Group plans to confirm the appointment of the independent party, as well as the detailed terms of reference for the Independent Review, with the market as soon as practicable,” the exchange said.

The scope of the review will include:

• Forensic analysis of trading and position activity, including OTC trading
• Evaluation of volatility control mechanisms and potential reforms
• Consideration of a stricter position management regime
• Incorporation of reform proposals from market stakeholders

“The LME Group wishes to emphasize our recognition of the impact of recent events on many stakeholders,” it stated. The exchange added that these reviews would support the long-term health, efficiency, and resilience of the LME and its participants.