South China Morning Post
Advertisement
Advertisement
Banking & finance
Get more with myNEWS
A personalised news feed of stories that matter to you
Learn more
Traders, brokers and clerks on the trading floor of the open outcry pit at the London Metal Exchange in February 2022. Photo: Bloomberg
BusinessBanking & Finance

LME to overhaul margins, introduce new nickel contract in market revamp

  • HKEX-owned bourse is seeking to rebuild investor confidence a year after chaos in nickel market forced trading halt, cancellation of trades
  • New ‘action plan’ includes permanent daily price limits, effort to develop new contract for lower-grade nickel with Chinese bourse
Banking & finance
Chad Bray
Chad Brayin London
Why you can trust SCMP
The London Metal Exchange (LME) has unveiled its long-awaited “action plan” to improve its markets a year after a short squeeze threatened to destabilise the global nickel market, saying it would overhaul its margin requirements and introduce a new nickel contract focused on the Asian markets to improve liquidity.
As part of a two-year overhaul, the Hong Kong Exchanges and Clearing (HKEX)-owned bourse also said it would seek to further enhance its monitoring of liquidity and over-the-counter (OTC) positions, as well as make daily price limits on its physically delivered metals a permanent feature of its markets going forward.
“We remain fully committed to supporting the trading community as we drive forward initiatives to build deep resilient liquidity across our markets, and we look forward to working with our stakeholders to deliver these enhancements,” LME CEO Matthew Chamberlain said in a statement on Thursday.

Large off-exchange positions in nickel have been partially blamed for chaos in the nickel market last March as the metal’s price soared more than 270 per cent over a three-day period following Russia’s invasion of Ukraine, triggering nearly US$16 billion in margin calls.

13:54

HKEX CEO Nicolas Aguzin on the future of Hong Kong’s capital market

HKEX CEO Nicolas Aguzin on the future of Hong Kong’s capital market

The LME was ultimately forced to suspend trading and cancel billions of dollars of transactions on March 8, 2022, a move that has sparked a series of legal actions by investors over the 146-year-old bourse’s response.

The bourse also is facing an enforcement inquiry by the Financial Conduct Authority, Britain’s top financial watchdog, into the LME’s conduct, as well as its systems and controls, leading up to the suspension of trading last year.
In an independent review that concluded in January, the consulting firm Oliver Wyman found the bourse needed to tighten its rules to improve its ability to identify and prevent future market distortions, including adopting LME-specific position limits and revamping its existing accountability level framework to help address risks created by large positions.

Since last year’s chaos, the LME has introduced a series of measures to try to avoid similar situations in future, including daily price limits for contracts that require metals to be physically delivered when a futures contract expires.

Last summer, the LME also began requiring its members to report their OTC positions on a weekly basis for these metals, including contracts for aluminium, copper, nickel, tin and zinc.
Despite its efforts, the LME has suffered a sharp fall in annual trading volumes as it struggles to regain investor confidence. It restarted trading hours during the Asian business day earlier this month in the hope of increasing liquidity, after a pause of more than a year.
LME Chief Executive Matthew Chamberlain (centre) speaks with the media during LME Asia Week 2018 at the HK Convention and Exhibition Centre in Wan Chai, 2018. Photo: SCMP/Xiaomei Chen

As part of its efforts to enhance liquidity, the LME said on Thursday that it would include coarse nickel powder as a deliverable form of so-called Class 1 nickel, in addition to the traditional nickel briquettes.

The bourse suffered embarrassment earlier this month when it was forced to invalidate more than US$2 million in nickel contacts, as it turned out the metal stored in a LME-registered warehouse in Rotterdam was actually stone.

At the same time, the LME said it would work with China’s Qianhai Mercantile Exchange, which is also owned by the HKEX, to develop a nickel contract for Class 2 nickel focused on the Asian market.

Class 1 nickel is of a higher purity, but increasingly plays a smaller role in the nickel usage globally. The LME’s closely watched three-month benchmark contract is based on the price of Class 1 nickel and is still used as a reference point to price lower-grade nickel.

“The LME will engage closely with the market to launch such an offering, and then assess whether it provides value to the market,” the bourse said.

Post