Being asleep at the wheel is invariably a hyperbolic cliché. But in the case of the London Metal Exchange and its regulators, it’s no metaphor; it’s a literal description of last year’s crisis in the nickel market.
In the crucial hours, overnight in London from March 7 into March 8, everyone who should have been alert, from exchange executives to British regulators and government officials, was in bed. In an era when commodity trading is increasingly a 24/7 business, regulation is still a cushy 9-to-5 job.
Now, thanks to a legal challenge, we know the inside story of the turmoil, almost minute to minute. Over three days of hearings in the High Court in London in late June, and across 649 pages of witness statements, the picture that emerged is deeply troubling. At one point, nickel prices jumped nearly 250% in less than 36 hours. Yet, the alarms didn’t sound loud enough inside the LME or any regulatory body. Everyone took the price gyrations as more of a hiccup than a crisis, failing to appreciate the stress building in the market. Until it was too late. Incredibly, the exchange and its regulators let nickel trading go ahead during Asia time, but none thought it prudent to stay awake to monitor the activity. Or double-check that someone else was.
The nickel crisis may have started in an obscure corner of the financial market — but it could have spread far beyond. Consider the following: On March 8, 2022, the LME’s clearinghouse was about to give brokers an hour's notice to put up nearly $20 billion to back up contracts — a demand that LME executives calculated could have wiped out between five and nine commodity brokers that morning. In financial markets, when the dominoes start to fall, no one knows when or where they stop.
Instead, the LME shut down nickel trading and canceled billions of dollars worth of contracts, so the brokers were spared the call for more collateral.
The chaos wasn’t for lack of warning. The previous day, on March 7, nickel prices shot up nearly 70%, prompting the LME to debate the merits of suspending trading; the UK financial regulator was informed, and the exchange’s top brass held a call with officials at the UK Treasury to bring them up to speed. Everyone who needed to know knew.
And yet, despite it, everyone in London went to bed as the market opened for Asian trading. “We will see where we stand 0800-0900 tomorrow,” Matthew Chamberlain, the exchange’s chief executive officer, wrote in an email to an unnamed official at the British regulator, the Financial Conduct Authority. It was 9:36 p.m. on March 7 with monitoring in the hands of a small team of junior LME employees in Hong Kong. The FCA didn’t follow up until the next day. If anyone else — say, at the Bank of England or the UK Treasury, had some concerns — they didn’t speak up either.
When Chamberlain woke up the subsequent morning at around 5:30 a.m. in London, nickel prices were up a further 25%. Soon after, they shot up vertically, reaching a peak of $101,365 per metric ton, double the previous day’s closing quote of $48,078 per ton.
The case at the High Court centers on whether the LME acted properly by canceling $12 billion of nickel trades during the early hours of March 8. Billionaire hedge fund tycoon Paul Singer argues it didn’t. Important as the legal challenge is, I’m less concerned about the LME-Singer battle and more about the regulation of the commodity markets that call London home. On top of metals like nickel, copper, and aluminum, there are oil and refined petroleum products, plus natural gas, coffee, sugar, and a few other raw materials. For financial trading of commodities, London — along with New York and Chicago — is the world’s most important city.
The most extraordinary piece of information from the witness statements is how little the FCA, the Bank of England, and the UK government — when they were awake — knew about the crisis as it was unfolding. On March 7, Chamberlain had a single phone call with the regulator – at his own initiative, rather than the other way around - and then a handful of emails. The FCA was sleeping at the wheel not just at night, but in broad daylight.
Reading the testimony from LME executives, it appears they didn’t think regulators were up to the job. In one passage, an exchange executive says a former LME chief operating officer thought the regulator didn’t have a “sufficient understanding” of the metals market. In another passage, the current head of compliance and regulation at the LME caustically says the FCA was, at the peak of the crisis, asking “ridiculous” questions.
A message from Advisor Perspectives and VettaFi: To learn more on this and other topics, check out our full schedule of upcoming CE-approved virtual events.
Bloomberg News provided this article. For more articles like this please visit
bloomberg.com.
