London Metal Exchange fine provides compliance reminder for firms

Anthony Harrison and Sébastien Ferrière, financial services experts at Pinsent Masons, were commenting after the FCA today announced it has fined the London Metal Exchange (LME) £9.2 million. The decision comes in response to the LME’s handling of extreme volatility in the nickel market in March 2022.

Harrison said: “This enforcement action shows that even a significant and reputable exchange like the LME is not immune from serious regulatory scrutiny and sanction. If anything, the need for robust systems and controls in places of intense and sometimes volatile financial activity are even more paramount; and a failure to have adequate ones in place can have major market impacts as was the case here.”

Between 4 and 8 March 2022, the price of nickel experienced unprecedented spikes, leading to a massive short squeeze. The rapid increase in price occurred within a short period of time, culminating in the early hours of 8 March 2022 when the price more than doubled compared the closing price the previous day. The majority of the rise occurred in little over an hour, causing LME to suspend its nickel market for eight days and cancel all nickel trades that took place on 8 March. 

The FCA’s investigation highlighted that LME’s systems and controls were found to be insufficient to manage this situation, resulting in significant market disruption. In particular, the LME’s policing relating to its automatic volatility controls – its “price bands” – were deemed inadequate under conditions of severe market stress. The exchange's processes for escalating unusual or hazardous market conditions to senior managers were also found to be inadequate. During the most extreme period of volatility, only relatively junior trading operations staff were on duty, and they had not been trained to handle such a situation. This lack of preparedness allowed the price of nickel to rise much more quickly than it should have, increasing the potential exposure of investors and market users to significant risks, according to the FCA.

The LME’s errors allowed for the price of its three-month nickel future controls to increase at a quicker rate than otherwise would have been possible, posing risk to both investors and other market users, which use of price banding was designed to mitigate, the FCA found.

Ferrière said: “The FCA’s action serves as a salutary lesson about ensuring that appropriately trained staff of sufficient seniority are operating in the right places of an organisation at the right times, with rigorous mechanisms for escalation when things go wrong. That is something that applies not just to major stock exchanges but to any regulated business.”

The FCA has acknowledged the work carried out by the LME following the March 2022 events, with the exchange setting out to enhance and strengthen its controls.

The exchange accepted the findings and therefore qualified for a 30% reduction in its financial penalty.

Alongside this enforcement action, the FCA delivered the wider market reform to the commodity derivatives regulatory framework (162 pages/2.6 MB), brought forward in February.