LME hit with $19m fine for inadequate controls during 2022 nickel market chaos

Britain’s Financial Conduct Authority (FCA) has handed down a fine of approximately $19 million on the London Metal Exchange (LME) after an investigation into the 2022 nickel price crash.

This is the first enforcement action the FCA has taken against a UK-recognised investment exchange.

The FCA punished the LME for failing to ensure its systems and controls were adequate to deal with severe market stress.

Extreme volatility

The price of LME’s three-month nickel futures contract encountered extreme volatility between 4 March 2022 and the early hours of 8 March, when its price rose to almost $160,000—more than double the closing price on 7 March 2022.

Most of the rise occurred in little over an hour.

In response, the LME suspended its nickel market for eight days and cancelled all nickel trades that took place on 8 March.

The FCA found that these events undermined the orderliness of, and confidence in, LME’s market and that its systems and controls were inadequate to ensure orderly trading under conditions of severe market stress.

Automatic volatility controls

In particular, the FCA determined the LME did not have adequate controls or policies relating to the operation of its automatic volatility controls—its so-called ‘price bands’.

Only certain designated senior LME managers were permitted to make decisions about market orderliness.

However, the FCA found inadequate processes were in place for escalating unusual or hazardous market conditions to those managers.

Junior operations staff

Investigations found that during the LME’s ‘Asian trading’ hours from 1am to 7am GMT, only relatively junior trading operations staff were on duty who had not been trained to recognise anything other than error trades or rogue algorithms as potential causes of a disorderly market.

According to the FCA, this meant that when price rises in the nickel contract became increasingly extreme during the early hours of 8 March, they were 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.

Increased exposure

“The LME’s breaches allowed the price of its three-month nickel futures contract to increase much more quickly than would otherwise have been possible,” the FCA said when releasing the results of its investigation.

“This increased the potential exposure of investors and market users to risks the price bands were designed to mitigate.”

Steve Smart, joint executive director of enforcement and market oversight at the FCA, said the authority had delivered a focused enforcement outcome for a complex investigation.

“London’s metal markets are of vital importance to the UK and global economy [and] we expect controls that match their significance—the LME should have been better prepared to address the serious risks posed by extreme volatility,” he said.

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