London Metal Exchange fined £9.2m by City watchdog over nickel price spike

The London Metal Exchange has been fined £9.2 million by the City watchdog for having inadequate systems and controls in place to deal with a controversial spike in the price of nickel three years ago.

The Financial Conduct Authority (FCA) said the penalty – its first ever against a UK recognised investment exchange – was made after it found the London Metal Exchange’s controls and policies failed to ensure orderly trading in times of “severe market stress”.

Nickel is the metal used in stainless steel and is key to the production of rechargeable lithium ion batteries.

Prices of the metal rose as it became harder to source, due in part to the Ukraine war and sanctions against President Vladimir Putin’s regime, given that Russia is one of the biggest producers of nickel.

But the price had risen rapidly by the early hours of March 8, peaking at 101,365 US dollars a tonne before trading was suspended, with the decision to cancel trades taken later that day.

Much of the gain happened in a little over an hour.

The market did not reopen until March 16 2022 with the suspension marking the first time the London Metal Exchange (LME) had frozen trading for a metal since the collapse of an international tin cartel in 1985, sparking criticism over the way the 145-year-old exchange handled the crisis.

“These events undermined the orderliness of and confidence in LME’s market,” the FCA said.

It added: “Decisions about market orderliness could only be taken by designated senior managers, but LME’s processes for escalating unusual or hazardous market conditions to those managers were inadequate.”

Only relatively junior trading operations staff were on duty overnight, during so-called Asian trading hours of 1am-7am, and had not been trained to deal with such a spike in the price.

The FCA said: “This meant that when price rises in the nickel contract became increasingly extreme during the early hours of March 8 it was not escalated to senior LME managers.

“Instead, trading operations staff took steps to accommodate the price rises, even disabling the price bands, during the most extreme period of volatility.”

The FCA confirmed it reduced the LME’s fine by 30%, given that it accepted the findings, and said the LME had worked to strengthen and boost its controls since the saga in 2022.

Steve Smart, joint executive director of enforcement and market oversight at the FCA, said: “London’s metal markets are of vital importance to the UK and global economy.

“We expect controls that match their significance.

“The LME should have been better prepared to address the serious risks posed by extreme volatility.”

The LME said that since March 2022, “significant work by both the LME and the FCA has materially reduced the risks of such an event from occurring again”.

Matthew Chamberlain, chief executive of the LME, added: “We take our responsibilities as a global market operator very seriously, and acknowledge that we could have provided a better line of defence to the effects of the disorder in the over-the-counter market.”

In October last year, commodity trader Elliott lost a Court of Appeal challenge against a ruling that the LME had acted lawfully by suspending and cancelling nickel trades following the spike.

Lawyers for Elliott previously had claimed that the decisions caused it to lose about 456 million US dollars (£352 million) in net profit.