London Metal Exchange Fined £9.2 Million Over Nickel Trading Crisis

The Financial Conduct Authority imposes a historic penalty for inadequate controls during nickel price volatility in 2022.

The London Metal Exchange (LME) has been fined £9.2 million by the Financial Conduct Authority (FCA) due to deficiencies in its systems and controls during a significant price spike in nickel witnessed in March 2022. This penalty marks the first-ever fine imposed by the FCA on a UK recognized investment exchange.

The FCA's investigation revealed that the LME's internal controls failed to maintain orderly trading amidst what it described as 'severe market stress.' Nickel, an essential metal for stainless steel and rechargeable lithium-ion batteries, saw its market price escalate dramatically due to factors including the ongoing conflict in Ukraine and international sanctions imposed on Russia, a major nickel producer.

From March 4 to March 8, 2022, the price of three-month nickel oscillated between $27,000 and $29,000 per tonne.

However, on the morning of March 8, prices surged to a peak of $101,365 per tonne within a short period, prompting the LME to suspend trading that same day.

This suspension was the first instance of the LME halting trades for a metal since 1985, raising concerns regarding the exchange's crisis management.

The FCA criticized the LME for inadequate escalation processes, specifying that senior personnel were not appropriately notified of the rapidly rising prices.

During the critical trading hours from 1 am to 7 am, staff with insufficient training were on duty, and instead of managing the situation, they even disabled price limits during the extreme volatility.

The FCA stated that the LME's actions failed to uphold market orderliness, undermining confidence in its trading environment.

As a result of the findings, the LME received a 30% reduction in its fine due to its acceptance of the conclusions drawn by the FCA, as well as subsequent efforts made to enhance its control mechanisms.

In comments regarding the situation, Steve Smart, joint executive director of enforcement and market oversight at the FCA, emphasized the LME's critical role in the global economy and expressed the necessity for robust market controls.

The LME has indicated that it has undertaken significant measures to mitigate the risks of similar occurrences in the future.

Matthew Chamberlain, the chief executive of the LME, acknowledged that the exchange had fallen short in its crisis response and took the situation seriously.

Additionally, in October 2022, the commodity trading firm Elliott lost a legal challenge against the LME concerning the suspension and cancellation of nickel trades, which Elliott contended resulted in substantial financial losses.