The London Metal Exchange needs to overhaul how it oversees live trading to prevent another market collapse after it was forced cancel $4 billion in nickel trades, a report into the fiasco says.
The exchange needs to improve its risk and control functions and upgrade its volatility controls, according to consultants Oliver Wyman, who were commissioned by the LME to review what caused the March 2022 crisis in the nickel market. Oliver Wyman investigated the events that led up to the breakdown, including the growing threat of sanctions on Russian nickel producers and low nickel warehouse stocks. Following the invasion of Ukraine on Feb. 24, nickel prices rose in line with other metals, and bid-ask spreads remained at typical historical levels, it found.
“Smaller physical nickel producers and traders began to cover short positions held in LME and OTC contracts, with 10 physical participants accounting for almost 50% of risk-reducing trades on 4 March. This led the nickel price to dislocate from other metals and appears to have been the start of the significant short squeeze that followed,” Oliver Wyman’s report said.
Oliver Wyman said the LME should “draft and formalise LME and LME Clear playbooks for each broad type of extreme event, recognising the need for flexibility and discretion given the wide variety of scenarios and inherent unknowns”. To improve confidence, Oliver Wyman also suggested developing a “clear vision” for how the LME will respond to events and rebuild liquidity in future.
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