LONDON, Sept 5 (Reuters) - Stung by an epic crisis in nickel
trading, the London Metal Exchange is ushering in new rules to
From Monday, members of the worlds oldest and largest venue
for buying and selling industrial metals will have to give the
exchange weekly reports on their over-the-counter (OTC) trades
-- bilateral deals between members and clients.
The LME has said that lack of visibility over how much
business was being done in OTC trades was behind the turmoil
that unfolded in March when the nickel price surged nearly 270%
over two days, prompting the exchange to halt trading and cancel
billions of dollars worth of deals.
But could the LME have used its own rules to get more
There were signs, in the weeks running up to the market
meltdown, of a large bet on prices falling, known as 'a short',
on the price of nickel, according to the LME's own published
Such trades are often just the tip of a much bigger pyramid
of OTC trades and seven metal trading sources say the size of
the on-exchange position should have triggered alarm bells about
the risk of market disorder.
"The LME's job is to run an orderly market. There were very
strong indications in the run up to the crisis in March that
there was a large short position out there," said Bank of
America analyst Michael Widmer.
"The LME should have been alert to any issues, particularly
as there were indications in the public space that there was an
The LME's rulebook gives it the right to ask its members and
their brokers for details about "any business" in metals,
including "'over-the-counter' business in the trading, storage
or financing of metals".
In a public statement on Oct 9. 2020, the LME said it would
only use those powers where strictly necessary, such as a probe
into suspected market abuse or other possible breaches of its
The LME did not define those breaches in its Oct. 2020
statement but according to its rulebook, the creation,
intentional or otherwise, of a disorderly market is prohibited.
Two regulation lawyers said that under these rules, the
exchange could have found out which LME members and which of
their clients were exposed in the nickel market and order them
to pare back or completely cut their positions.
They declined to be named because they were not authorised
to speak to the media.
"The rulebook provides the LME with extensive powers to
request information related to commercial matters, regulatory
compliance and market conduct related matters," said Adam
Topping, a partner specialising in commodities and financial
regulation at Holman Fenwick Willan.
"This includes information relating to OTC as well as
exchange business. In most circumstances, this should enable
them to obtain a wide range of relevant information when
investigating potential disorderly trading conditions."
Asked why the LME did not seek the OTC data, the exchange
said its ability to do so was restricted.
"Use of these powers is limited and requires a relatively
high evidential bar to first be met," the LME said in an emailed
Hong Kong Exchanges & Clearing, which has owned
the LME since 2012, referred requests for comment to the
exchange in London.
The breakdown in trading has drawn heavy criticism. Two
major financial players are suing the LME for nearly half a
billion dollars over its decision to cancel trades and Britain's
financial regulators are reviewing the market meltdown.
The LME has said it welcomed the reviews and has appointed
management consultants to carry out a separate independent
study. It tried last year to introduce reporting requirements
for OTC trades but some members opposed the move and it was
The LME is resisting the lawsuits from U.S. hedge fund
Elliott Associates and Jane Street Global Trading saying
unprecedented market conditions caused a "disorderly" market and
it wanted to protect stability and integrity and avoid multiple
Elliott and Jane Street declined to comment.
THE SHORT SQUEEZE
At the heart of the hypersonic move in the nickel market was
Chinese tycoon Xiang Guangda, who was betting big that the price
of nickel would fall, but doing so largely in the OTC market,
according to three of the metal trading sources.
Xiang has not commented publicly on the trade, which was
carried out via his Tsingshan Holding Group and has been widely
reported. Tsingshan declined to comment for this story.
The LMEs own on-exchange data gathered daily and published
with a one day lag showed one company held 20-29% of open
interest -- the number of outstanding contracts due to mature or
be rolled over at the next settlement date -- from early
February in the nickel market.
On March 4, the negative bet had climbed to 30-39% of open
Rising prices put traders betting on a drop in a tough
financial spot, requiring them to buy the asset to cover any
losses. Rivals in the market may push up prices in anticipation
of such purchases. The situation is known as a short squeeze.
As early as Feb. 18, a note from Kingdom Futures, a metals
broker, noted nickel prices were rising "in what seems to be an
attempt to flush out what is supposedly a major short position
held by a Chinese client".
As the price climbed, the losses facing Tsingshan and other
shorts surged, meanwhile funds and traders on the other side
of that position were amassing large profits.
The LME, which had been criticised for allowing the market
to open at all on March 8, abruptly suspended trading and
Asked why the LME didn't inquire about Tsingshan's OTC
positions and order them sold down, the exchange said the March
situation did not meet the criteria required.
"The LME has previously committed to these powers being
relatively limited in their application, and that they would
primarily be used in circumstances where the LME has genuine,
reasonably held grounds for suspecting that market abuse either
may be occurring, or has occurred, on its market."
There has been no suggestion of deliberate market abuse in
the nickel market meltdown and the LME's own reference to 'other
possible breaches' of its rules in its Oct. 9 2020 statement
give it wide latitude to poke around, the lawyers said.
"'Possible breaches of the rules' appears to cast a wide net
in terms of potentially relevant information they could seek to
access, said Topping.
(Reporting by Pratima Desai; editing by Carmel Crimmins)