On Tuesday 8 March 2022, the London Metal Exchange (the LME) suspended nickel trading, having concluded a disorderly market had arisen. Nickel trading resumed on the LME on Wednesday 16 March. The suspension occurred amid challenging commodity market conditions following Russia’s invasion of Ukraine.
The Financial Conduct Authority (the FCA) is responsible for supervision of the LME as a recognised investment exchange, while the Bank of England (the Bank) is responsible for supervision of LME Clear as a central counterparty. The FCA and the Prudential Regulation Authority (the PRA) are responsible for the supervision of several regulated banks and investment firms who participate in the LME’s markets. The FCA, Bank and PRA have been focused on the orderly resumption of trading in nickel. Now that trading has resumed, the supervisory authorities expect LME and LME Clear to remain vigilant until the situation is fully resolved.
However, after a period of stability, the FCA intends to review the LME’s approach to managing the suspension and resumption of the market in nickel to determine what lessons might be learned in relation to the LME’s governance and market oversight arrangements.
The Bank will similarly undertake a review into the operation of LME Clear during the period to determine whether any lessons might be learned in relation to its governance and risk management.
Both the FCA and the Bank intend that these reviews will be assisted by the appointment of skilled persons to report on the matter, under section 166 of the Financial Services and Markets Act 2000. The FCA and the Bank will consider these reports in determining whether further action should be taken and will announce next steps in due course.
The PRA and FCA will also be engaging further, through their supervisory processes, with firms who held significant positions in the market to assess the effectiveness of their risk management and governance during the period.
Events around the suspension and resumption of trading have underlined questions raised in a recent LME Discussion Paper on Market Structure, particularly the role of transparency in the LME and related markets. The FCA has been in discussion with the LME on its proposals for some time and expects the LME to consider carefully how recent events should shape its future approach on market structure.
Additionally, the LME has agreed the benefits of appointing additional independent directors to strengthen its governance and will now review the best way to achieve this in the context of the skills and composition of its board.