LME faces Elliott Management's US$456 million lawsuit for suspending nickel futures trading, cancelling trades

The London Metal Exchange (LME) has been sued in the British courts by affiliates of American hedge fund Elliott Management over its controversial decision in early March to suspend trading of nickel futures contracts and cancel trades in the metal amid a short squeeze on the century-old bourse.

Elliott International and Elliott Associates have filed a judicial review claim in England's High Court of Justice against LME for US$456 million, claiming that the trading suspension and trades cancellation "constituted a violation of [their] human rights". The suit was filed on June 1, and served on the metals exchange on June 2.

The suit is "without merit", and LME will "contest the claim vigorously", according to a statement on Monday by Hong Kong Exchanges and Clearing (HKEX), which owns LME following a takeover in June 2012.

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The lawsuit came as Nicolas Aguzin, HKEX's CEO, was expected in London to meet LME executives to celebrate the 10th anniversary of its acquisition this month. HKEX's shares fell by as much as 1.2 per cent in Hong Kong in early morning trading, before rising 1.6 per cent to close at HK$347.60 on Monday.

The LME "acted unlawfully in that it exceeded its powers" in cancelling trades on March 8 or exercised its powers "unreasonably and irrationally" at the time by taking into account "irrelevant factors", such as its own financial position, an Elliott spokesperson said.

A LME spokeswoman said the exchange believed the nickel market had become "disorderly" in the early hours of March 8 and the decision was made to cancel trades in order "to take the market back to the last point in time at which the LME could be confident that the market was operating in an orderly way".

"At all times the LME, and LME Clear, sought to act in the interests of the market as a whole," she said. "The LME therefore considers that Elliott's grounds for complaint are without merit, and the LME will defend any judicial review proceedings vigorously."

The metals exchange was raked over the coals by some traders for its decision to cancel transactions after it halted nickel trading amid significant price volatility. A chaotic restart of trading a week later also damaged its reputation as the go-to venue for metals trading.

A 250 per cent price surge in just over 24 hours imperilled dozens of short sellers, the biggest being the world's largest stainless steel producer Tsingshan Holding Group. Its paper loss was estimated at US$3 billion by Bloomberg.

The bourse proposed a new requirement last month that its members 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. Matthew Chamberlain, the LME's CEO, has pointed to the lack of transparency in OTC positions as one reason the bourse struggled to identify and manage the situation.

UK financial regulators also are conducting their own review of the exchange's handling of the situation, in addition to an independent inquiry announced by the LME.

The International Monetary Fund also has called for the LME to strengthen its governance mechanisms to avoid potential conflicts of interest. Traders said the cancelling of trades favoured some investors over others.

Nickel contracts have been changing hands at a fraction of their previous volumes since trading resumed, raising the question whether the LME - with its quaint rituals - is still reliable when it comes to setting the prices of metals such as aluminium, copper, nickel and zinc. Mainland China, the biggest worldwide consumer of industrial metals, already offers a trading venue in the form of the Shanghai Futures Exchange.

London Metal Exchange (LME) chief executive Matthew Chamberlain delivered a speech during the LME Asia week hosted at the Hong Kong stock exchange in Central, Hong Kong on 7 May 2019. Photo: K.Y. Cheng alt=London Metal Exchange (LME) chief executive Matthew Chamberlain delivered a speech during the LME Asia week hosted at the Hong Kong stock exchange in Central, Hong Kong on 7 May 2019. Photo: K.Y. Cheng>

The nickel rout, just months shy of the 10th anniversary of HKEX's takeover of LME in June, has tarnished the years-long efforts by Chamberlain to modernise the 145-year-old metals exchange and stave off competitors such as CME Group in Chicago and the Shanghai exchange. LME transactions have fallen for three straight years, shrinking 6.4 per cent in 2021.

Chamberlain, a former UBS banker who advised HKEX on its £1.4 billion (US$1.8 billion) purchase of LME, joined the metals exchange in 2012 as its head of business development before being promoted to CEO in 2017.

He announced that he would stay on in the LME's top job in late April, walking back the announcement he made three months earlier to leave for a job at Komainu, a custody business for cryptocurrencies and other digital assets backed by digital assets firm CoinShares, cryptocurrency wallet company Ledger and Nomura.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2022 South China Morning Post Publishers Ltd. All rights reserved.

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