The London Metal Exchange (LME) has proposed a new requirement that its members report their off-exchange positions in some metals, as it seeks to rebuild its reputation following a turbulent period in nickel trading earlier this year.
The Hong Kong Exchanges and Clearing (HKEX)-owned bourse has asked for feedback on a plan to require its members to report their over-the-counter (OTC) positions on a weekly basis for metals contracts that require the metal to be physically delivered when a futures contract expires.
The metals at issue include aluminium, copper, nickel, tin and zinc. The consultation period is set to run until May 27.
“Recent events in the LME Nickel market have demonstrated the effects that OTC activity can have on the wider LME market,” the bourse said in a consultation paper released on Friday. “The LME believes it is now essential to accelerate the introduction of regular OTC reporting, and correspondingly to introduce related accountability levels, for all physically deliverable metals on the LME.”
The LME was forced to cancel trades and suspend nickel trading for a week in early March, as a surge in prices threatened to destabilise the market amid a short squeeze that triggered billions of dollars in margin calls.
It was only the second time in its 145-year history that the exchange had cancelled trading in one of its metals.
Nickel prices, alongside other commodities, rose dramatically in early March following Russia’s invasion of Ukraine and amid concerns about supply shortages.
A chaotic restart of trading further tarnished its reputation, opening the door for competitors, such as CME Group in Chicago and the Shanghai Futures Exchange, to expand their market share.
Matthew Chamberlain, the LME CEO, has pointed to the lack of transparency in OTC positions as one reason the bourse struggled to identify and manage the situation.
Chinese metals firm Tsingshan Holding Group, the world’s biggest producer of stainless steel, built up a massive short position ahead of the surge in nickel prices and found itself facing about US$3 billion in losses. Trading only resumed after it reached standstill agreements with its banks.
Major banks lobbied against greater transparency for OTC positions held away from the exchange last year, said Chamberlain, who agreed to stay on as CEO in April after announcing plans to leave the bourse earlier this year.
In April, the Bank of England and the Financial Conduct Authority, Britain’s chief financial regulators, said they would conduct a review of the LME’s handling of the unprecedented suspension of nickel trading and its chaotic resumption. The LME also announced its own independent review in the matter at the time.
In its Global Financial Stability Report last month, the International Monetary Fund also said the LME needed to strengthen its governance mechanisms to avoid potential conflicts of interest. Traders have criticised the cancelling of trades, saying it favoured some investors over others.
“The LME will continue to proactively develop and assess further potential market structure reform proposals aimed at mitigating the risk of circumstances similar to those leading to the events of 8 March 2022 arising in the future,” the bourse said in its consultation paper.
“Where the LME considers it to be in the interest of the long-term health, efficiency and resilience of the market and appropriate to do so, the LME may seek to proactively introduce further such measures prior to the conclusion of the ongoing independent review, and will subsequently assess any further appropriate changes in light of the findings,” the LME added.