# Analysis-Nickel meltdown puts spotlight on LME’s search powers
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-09-05
Category: NEWS
Category URL: https://financedigest.com/category/news
Meta Title: London Metal Exchange Implements New Transparency Rules
Meta Description: Learn how the London Metal Exchange is bringing in new regulations to enhance transparency in nickel trading after a recent market crisis. Stay informed with
URL: https://financedigest.com/analysis-nickel-meltdown-puts-spotlight-on-lmes-search-powershtml

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By Pratima Desai

LONDON (Reuters) – Stung by an epic crisis in nickel trading, the London Metal Exchange is ushering in new rules to boost transparency.

From Monday, members of the world’s oldest and largest venue for buying and selling industrial metals will have to give the exchange weekly reports on their over-the-counter (OTC) trades — bilateral deals between members and clients.

The LME has said that lack of visibility over how much business was being done in OTC trades was behind the turmoil that unfolded in March when the nickel price surged nearly 270% over two days, prompting the exchange to halt trading and cancel billions of [dollars worth of deals](https://www.financedigest.com/incentive-fm-secures-new-deal-with-dollar-uk.html "Incentive FM Secures New Deal with Dollar UK").

But could the LME have used its own rules to get more information?

There were signs, in the weeks running up to the market meltdown, of a large bet on [prices falling](https://www.financedigest.com/uk-house-prices-stabilise-after-four-month-fall-halifax-says.html "UK house prices stabilise after four-month fall, Halifax says"), known as ‘a short’, on the price of nickel, according to the LME’s own published data.

Such trades are often just the tip of a much bigger pyramid of OTC trades and seven metal trading sources say the size of the on-exchange position should have triggered alarm bells about the risk of market disorder.

The LME’s job is to [run an orderly market](https://www.financedigest.com/connectivity-to-run-through-the-forklift-trucks-market-at-a-cagr-of-7-4-from-2021-to-2031.html "Connectivity to run through the Forklift Trucks Market at a CAGR of 7.4% from 2021 to 2031"). There were very strong indications in the run up to the [crisis in March that there was a large short position out there,” said Bank](https://www.financedigest.com/how-the-2023-banking-crisis-unfolded.html "How the 2023 banking crisis unfolded") of America analyst Michael Widmer.

The LME should have been alert to any issues, [particularly as there were indications in the public](https://www.financedigest.com/increasing-private-and-public-investment-in-digital-imaging-technology-particularly-in-the-field-of-healthcare.html "Increasing private and public investment in digital imaging technology particularly in the field of healthcare") space that there was an issue.

The LME’s rulebook gives it the right to ask its members and their [brokers for details about “any business”](https://www.financedigest.com/reasons-why-you-should-hire-a-business-broker-to-sell-your-business.html "Reasons Why You Should Hire a Business Broker to Sell Your Business") in metals, including “‘over-the-counter’ business in the trading, storage or financing of metals.

In a public statement on Oct 9. 2020, the LME said it would only use those powers where strictly necessary, such as a [probe into suspected market abuse](https://www.financedigest.com/italy-probes-meta-over-abuse-of-position-in-music-rights-case.html "Italy probes Meta over abuse of position in music rights case") or other possible breaches of its rules.

The LME did not define those breaches in its Oct. 2020 statement but according to its rulebook, the creation, intentional or otherwise, of a [disorderly market](https://www.financedigest.com/the-attention-deficit-hyperactivity-disorder-therapeutics-market-to-grow-at-an-exponential-substantiation.html "The Attention Deficit Hyperactivity Disorder Therapeutics Market to grow at an exponential substantiation") is prohibited.

Two regulation lawyers said that under these rules, the [exchange could have found out which LME members and which of their clients were exposed in the nickel market](https://www.financedigest.com/the-health-information-exchange-market-to-grow-on-a-satisfactory-note.html "The Health Information Exchange Market to grow on a satisfactory note") and order them to pare back or completely cut their positions.

They declined to be named because they were not authorised to speak to the media.

The rulebook provides the LME with extensive powers to request information related to commercial matters, regulatory compliance and [market conduct related](https://www.financedigest.com/customized-innovation-to-drive-the-aids-related-cancer-market.html "Customized innovation to drive the Aids Related Cancer Market") matters,” said Adam Topping, a partner specialising in commodities and financial regulation at Holman Fenwick Willan.

This includes information relating to OTC as well as [exchange business](https://www.financedigest.com/small-business-strategies-for-foreign-exchange.html "Small business strategies for foreign exchange"). In most circumstances, this should enable them to obtain a wide range of relevant information when investigating potential disorderly trading conditions.”

Asked why the LME did not seek the OTC data, the exchange said its ability to do so was restricted.

“Use of these powers is limited and requires a relatively high evidential bar to first be met,” the LME said in an emailed response.

[Hong Kong](https://www.financedigest.com/citadel-accelerates-hiring-push-in-hong-kong-and-london.html "Citadel accelerates hiring push in Hong Kong and London") Exchanges & Clearing, which has owned the LME since 2012, referred requests for comment to the exchange in London.

The breakdown in [trading has drawn heavy criticism](https://www.financedigest.com/machine-learning-critical-for-better-sme-credit-scoring-in-trade-finance.html "Machine learning critical for better SME credit scoring in trade finance"). Two major financial players are suing the LME for nearly [half a billion](https://www.financedigest.com/spotify-listeners-cross-half-a-billion-mark.html "Spotify listeners cross half a billion mark") dollars over its decision to cancel trades and Britain’s financial regulators are reviewing the market meltdown.

The LME has said it welcomed the reviews and has [appointed management](https://www.financedigest.com/mg-appoints-former-head-of-axa-investment-managers-andrea-rossi-as-new-ceo.html "M&G appoints former head of AXA Investment Managers Andrea Rossi as new CEO") consultants to carry out a separate independent study. It tried [last year](https://www.financedigest.com/uk-new-car-sales-rise-in-january-full-year-sales-to-top-last-year-smmt.html "UK new car sales rise in January, full-year sales to top last year – SMMT") to introduce reporting requirements for OTC trades but some members opposed the move and it was dropped.

The LME is resisting the lawsuits from U.S. [hedge fund](https://www.financedigest.com/what-is-a-hedge-fund.html "What Is A Hedge Fund") Elliott Associates and Jane Street Global Trading saying unprecedented market conditions caused a “disorderly” market and it wanted to protect stability and integrity and avoid multiple defaults.

Elliott and Jane Street declined to comment.

THE SHORT SQUEEZE

At the heart of the hypersonic move in the nickel market was Chinese tycoon Xiang Guangda, who was betting [big that the price of nickel would fall](https://www.financedigest.com/big-fall-in-euro-zone-inflation-offers-little-help-for-ecb.html "Big fall in euro zone inflation offers little help for ECB"), but doing so largely in the OTC market, according to three of the metal trading sources.

Xiang has not commented publicly on the trade, which was carried out via his Tsingshan Holding [Group and has been widely reported](https://www.financedigest.com/uk-report-warns-of-impact-of-islamist-groups-in-prisons.html "UK report warns of impact of Islamist groups in prisons"). Tsingshan declined to comment for this story.

The LME’s own on-exchange data gathered daily and published with a one [day lag showed one company held 20-29% of open interest — the number of outstanding contracts due to mature or be rolled over at the next settlement date](https://www.financedigest.com/explainer-international-womens-day-date-history-and-this-years-theme.html "Explainer-International Women’s Day: date, history and this year’s theme") — from early February in the nickel market.

On March 4, the negative bet had climbed to 30-39% of open interest.

Rising prices put traders betting on a drop in a tough [financial spot](https://www.financedigest.com/new-york-holds-top-spot-london-second-in-z-yen-financial-centre-survey.html "New York holds top spot, London second in Z/Yen financial centre survey"), requiring them to buy the asset to cover any losses. Rivals in the [market may push up prices in anticipation](https://www.financedigest.com/grab-and-go-containers-market-anticipated-to-have-positive-potential-during-the-forecast-period-fmi.html "Grab and Go Containers Market anticipated to have positive potential during the forecast period.: FMI") of such purchases. The situation is known as a short squeeze.

As early as Feb. 18, a note from Kingdom Futures, a metals broker, [noted nickel prices](https://www.financedigest.com/uk-house-prices-end-2022-on-a-weaker-note-after-pandemic-boom.html "UK house prices end 2022 on a weaker note after pandemic boom") were rising “in what seems to be an attempt to flush out what is supposedly a major short position held by a Chinese client.

As the price climbed, the [losses facing Tsingshan and other ‘shorts’ surged](https://www.financedigest.com/weight-loss-machine-market-set-to-surge-significantly-during-2021-2031-tmr.html "Weight loss Machine Market Set to Surge Significantly During 2021-2031 | TMR"), meanwhile funds and traders on the other side of that position were amassing large profits.

The LME, which had been criticised for allowing the [market to open](https://www.financedigest.com/eex-markets-to-remain-open-as-power-prices-soar-statement.html "EEX markets to remain open as power prices soar – statement") at all on March 8, abruptly suspended trading and cancelled trades.

Asked why the LME didn’t inquire about Tsingshan’s OTC positions and order them sold down, the exchange said the March situation did not [meet the criteria required](https://www.financedigest.com/how-automation-can-help-the-financial-sector-meet-gdpr-requirements.html "How automation can help the financial sector meet GDPR requirements").

The LME has previously committed to these powers being relatively limited in their application, and that they would primarily be used in circumstances where the LME has genuine, reasonably held [grounds for suspecting that market](https://www.financedigest.com/ground-support-equipment-gse-tires-air-market-to-grow-rapidly-during-the-forecast-period-2018-2028.html "Ground Support Equipment Gse Tires Air Market to Grow rapidly During the Forecast Period 2018 – 2028") abuse either may be occurring, or has occurred, on its market.

There has been no suggestion of deliberate [market abuse in the nickel market meltdown and the LME’s own reference to ‘other possible breaches’ of its rules](https://www.financedigest.com/telehealth-monitoring-to-rule-the-prosthesis-implantation-instruments-market.html "Telehealth monitoring to rule the Prosthesis Implantation Instruments Market") in its Oct. 9 2020 statement give it wide latitude to poke around, the lawyers said.

‘Possible breaches of the [rules’](https://www.financedigest.com/telehealth-monitoring-to-rule-the-the-transseptal-access-systems-market.html "Telehealth monitoring to rule the The Transseptal Access Systems Market") appears to cast a wide net in terms of potentially relevant information they could seek to access,” said Topping.

(Reporting by Pratima Desai; editing by Carmel Crimmins)


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