LME credibility after nickel saga now top of Chamberlain’s ‘to do’ list

Hotter on metals

When Matthew Chamberlain announced his intention to leave his role as chief executive officer of the London Metal Exchange earlier this year, he did not expect to be staying in the job beyond the end of April.

He had been at the exchange, the world’s largest metals trading venue, for a decade, and had accepted a new challenge at Komainu, a joint venture between Japanese custodian Nomura, blockchain expert Ledger, and digital asset investment manager CoinShares.

That was, inevitably, thrown somewhat up in the air after the exchange was forced to suspend trade in its nickel contract following wild volatility that drove prices up to more than $101,000 per tonne in March.

Adrian Farnham had already agreed to assume the role of interim CEO, postponing his decision to retire this year while the search for a new CEO was made. Farnham, who also runs the exchange’s clearing house, LMEClear, had in January informed the LME of his plan to retire, but had not made that information public.

Clearly, hiring a new, permanent CEO, during what is arguably one of the exchange’s most tumultuous times since the Hamanaka crisis of 1996, was not an ideal situation for the LME, or its owner Hong Kong Exchanges & Clearing (HKEX), to find themselves in.

Bring in an outsider to the metals and mining world - and face a multiple months-long learning curve that the exchange could not currently afford. Find an experienced candidate from the metals community and you hit the ground running - although that person would be forced to make some tough decisions in the months ahead and become fairly unpopular with certain sections of the exchange ecosystem.

The pressure on Chamberlain to remain - including from HKEX - probably started building from the day that the exchange realized that it had a problem in nickel.

A well-documented series of events have since followed, leading to regulatory reviews by the UK’s Financial Conduct Authority (FCA), Prudential Regulation Authority and Bank of England, of both the LME and its clearing house, as well as a review to be conducted by the LME via an experienced independent party or parties.

The regulatory bodies are conducting their reviews at their own pace, while the independent review looks likely to begin in the next few weeks and to be completed by the end of this summer, allowing the exchange to make the findings public some time ahead of the annual LME Week in London.

Earlier on Wednesday April 27, the LME announced that Chamberlain would not be leaving after all, and that he would remain in the role as a permanent appointment.

Chamberlain is clearly staying with the explicit blessing of HKEX and the LME board, meaning that they are comfortable with his decision-making and the actions taken throughout his tenure, including during the recent events in nickel.

While the choice of CEO is not something on which the regulators tend to weigh in, the fact that they did not communicate any implicitly negative feelings about Chamberlain staying at the helm means more or less the same thing.

That does not mean that the LME has acted perfectly, however. There has been strong criticism of its decision to cancel trades, for example - although not from most of the exchange’s members, who could see the potential carnage around margin calls that would otherwise have been created.

There have also been questions about why it did not see the nickel short position building, and whether it could have acted sooner.

Restoring the LME’s reputation for credible, orderly price discovery is now critical, and likely to be at the top of Chamberlain’s ‘to do’ list. Financializing the exchange by driving algorithmic and speculative trading activity to the exchange’s electronic platform is not likely to feature – ironically, at a time when some of the participants it has been wooing are considering taking legal action over canceled trades.

Chamberlain continues to report to Nicolas Aguzin, HKEX CEO, who has stated his desire to push the exchange deeper into China. This is a move that will appeal to traditional trade and industry members, who have spent much of the past decade pushing back on financialization, and are more than ready for the LME to focus on its core contracts.

What pushing deeper into China will mean remains to be seen, but clearly there is a desire within that country to tone down the excesses of speculative trading activity, something it would have felt far too closely in its dealings with Tsingshan Holdings Group due to nickel.

Just as the LME and its regulators have an enhanced willingness to look at enforcing new rules in over-the-counter (OTC) reporting, so too is there an enhanced willingness within China to look at the broader LME relationship.

Spot trading platforms will probably play a role here. HKEX’s Qianhai Mercantile Exchange joint venture platform has started to gain traction, and could be a venue for new products, particularly around low-carbon materials.

Sustainability issues are also at the fore, particularly because the LME’s responsible-sourcing reporting requirements take effect this year.

But Chamberlain’s biggest task now is credibility. For the first time in a while, the twists and turns of the nickel saga mean that he has the core membership onside.

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