While the relief at the London-based exchange and its parent, Hong Kong Exchanges & Clearing (HKEX), is likely palpable, the result announced on Wednesday, November 29 should not really come as a surprise.
The LME and its clearing house, LME Clear, were facing lawsuits seeking damages collectively worth more than half-a-billion dollars for losses that investors allege they suffered as a result of nickel trades being canceled by the exchange last year.
There were five main lawsuits, filed within a year of the cancellations on March 8, 2022.
The Court ruling relates to the biggest financial claim, by Elliott Management Corp, which was worth more than $456 million, as well as the suit led by Jane Street, which was the third largest at $15.34 million.
At the end of the day, the LME always had one very important factor on its side: its own rules.
Putting aside any theoretical rights and wrongs of the arguments, the LME rulebook clearly states that “where the exchange considers it appropriate, the exchange may cancel, vary or correct any agreed trade or contract.”
An entity agreeing on a contract to trade on the LME knows the rules of engagement – and if it does not know them, it should.
As the High Court said, Elliott and Jane Street consented to subject themselves to the decision-making of the LME and its clearing house, by contracting on terms providing for the LME Rules.
“The power to cancel trades not only has its origin in MiFID II [which directly reflects the public policy concerns associated with the maintenance of orderly trading], but ultimately is effective as against these claimants because they have agreed to be bound by the LME rules and LME Clear rules, as a condition of trading on the LME,” the Court judgment said.
It is important to note that the existence of exchange rules is not unique to the LME, nor to any exchange operating in the UK or the financial system worldwide.
The lawsuits did not center on whether the LME should have acted to suspend the market when it did.
In reality, if it had not acted to halt nickel trade, several members would have become insolvent, and the ensuing chaos would have affected far more than just the nickel sector. The exchange’s clearing house would have been in jeopardy, along with physical and industrial users around the world.
The lawsuits instead focused on the LME’s decision to cancel trades that had occurred on its venues from 0000hrs on March 8. These cancellations happened irrespective of whether they were binding contracts — such as the LME filings said that Jane Street held – or agreed trades that had not been executed – such as the LME filings said that Elliott held.
The LME says that it deemed the nickel market to have become disorderly in the early hours of March 8, leading it to its decision to suspend trade and cancel all contracts executed during London time that day.
The goal, it argued, was to take the market back to the last point in time at which it could be confident that the market was operating in an orderly way – “winding back the clock,” as the LME put it in its legal filings. The LME was, it said, acting in the interests of the market as a whole.
The Court agreed.
Legal filings made by the exchange and LME Clear revealed that almost $20 billion would have been owed by members and their clients in intraday margin calls if the exchange had not suspended the contract and canceled trades.
In all likelihood, this would have led multiple members into default, constrained the provision of credit by members to trade and industry clients, and destabilized the broader market ecosystem so that, even if users were not trading nickel, they would still have been affected.
Let us not forget: on March 7 and 8, LME nickel prices rose by a stunning 250%. The majority of the gains came in early London trading on March 8, when the price leapt above $100,000 per tonne, having closed at an already surprising $48,078 per tonne the previous day.
Having been found to have acted lawfully, rationally, and in accordance with its rules, the LME will now be hoping to draw a line under the legal action, and will continue to work on rebuilding confidence in its nickel contract, which has struggled to regain liquidity since the events of March 2022.
Alternative ways have been proposed to trade nickel, such as on Abaxx Exchange Pte Ltd and Global Commodities Holding (GCH), and the LME is aware that it cannot sit on its laurels and expect market participants — especially investors such as Elliott and Jane Street — to simply return overnight.
The LME knows that it has to work hard to rebuild credibility, and has already taken various steps in this process.
These include a two-year plan to “strengthen and enhance” its markets in direct response to recommendations outlined in an independent report by management consultancy firm Oliver Wyman.
There is obviously more work to be done, including reform of the over-the-counter (OTC) market, where trades take place directly between two parties without the supervision of the exchange.
The LME has for many years been asking its members for greater oversight of the OTC market. It has added a new level of OTC reporting, although the exchange needs the UK regulator to support it further and make the necessary legislative change.
All of this does not, of course, wave away the LME’s nickel problems.
First, an appeal of the High Court verdict is likely. That must be granted by the Court of Appeal; if this is refused, then the lawsuits – and the remaining three that have been stayed during the Elliott and Janes Street case – will fall away.
A thorough review of the High Court ruling reveals that it found firmly in favor of the LME in all of the claims, suggesting that taking the suits to appeal would potentially only serve to further enrich the bank accounts of the respective legal teams.
The LME and LME Clear nonetheless remain subject to regulatory reviews by the UK’s Financial Conduct Authority (FCA) and the Bank of England. The High Court verdict will probably have been closely watched by both regulatory entities as they continue their work.
In Hotter Commodities, special correspondent Andrea Hotter covers some of the biggest stories impacting the natural resources sector. Sign up today to receive Andrea’s content as it is published.