By Eric Onstad and Pratima Desai
LONDON, March 8 (Reuters) - One year after nickel
trading went haywire on the London Metal Exchange (LME), the
146-year old exchange is fighting to mend its reputation amid a
host of lawsuits, vigorous action by regulators and struggling
volumes.
The impact of March 8, 2022, will last years after nickel
prices erupted in a record-breaking surge, forcing the world's
largest forum for metals to halt trading and void billions of
dollars worth of nickel deals, angering many investors.
The danger is the aftershocks of last year's events could
mean the LME's nickel contract fails to regain its benchmark
status as the CME Group , Shanghai Futures Exchange and
others manoeuvre for a slice of the nickel pie.
Volumes have slumped as many investors, traders, consumers
and producers abandoned LME nickel in the wake of the chaos.
Over the past few days, the LME has been hit with new
lawsuits in addition to existing legal action by U.S. hedge fund
Elliott Associates and Jane Street Global Trading, which are
suing the LME for a total of $472 million.
"The resources these cases are going to need are phenomenal
and coupled with the enforcement investigation it means the LME
won't be focusing on its main job, which is to run an exchange,"
said a senior metals broker.
Last Friday, Britain's Financial Conduct Authority (FCA)
launched its first ever investigation of a UK exchange for
potential misconduct.
The same day, the Bank of England said its reviews had
pointed to several shortcomings at LME clearing house LME Clear,
adding it would name an independent monitor.
The nickel crisis, spurred partly by over-the-counter (OTC)
short nickel positions, has prompted reforms by the LME,
including 15% price limits and OTC position reporting.
The regulatory actions and legal cases will stoke debate
within the financial community about the timing of the LME's
controversial decision to cancel trades.
"Did the LME act quickly enough? Possibly not. The warnings
were there in January and February," said Malcolm Freeman, chief
executive of broker Kingdom Futures.
Metal industry sources say the LME needs all its focus and
energy to rebuild its nickel contract.
Futures and options nickel volumes last month were at only
58% of the levels in February last year.
One bright spot for the LME is its planned restart of
nickel trading during Asian hours on March 20, providing a
possible boost for liquidity.
Rivals of the LME, owned by Hong Kong Exchanges and Clearing , are looking to exploit the exchange's current
perceived weakness.
The CME plans to launch a nickel contract settled with
prices gathered from a platform to be launched by UK-based
Global Commodities Holdings, sources told Reuters last month.
Moreover, the LME is grappling with a major disconnect with
the physical market, dominated by nickel pig iron which cannot
be delivered against LME contracts.
Nickel that can be delivered against the LME's contract
comprised just 20% of global supplies last year.
"Loss of confidence in the exchange and its nickel contract
have created a vicious cycle of lower volumes and liquidity,
which is going to be tough to restore," a metal industry veteran
said.
(Reporting by Eric Onstad and Pratima Desai; Editing by
Veronica Brown and Mark Potter)
