London Metal Exchange legal fight heats up after nickel fiasco

It is not often the London Metal Exchange sets pulses racing to anyone outside The Ring, which is not a Wagnerian opera cycle but Europe’s last open outcry trading floor. 

Despite hosting trillions of pounds worth of trades every year, the world’s oldest and biggest hub for industrial metals was seen as something of a backwater in the Square Mile. But in the early hours of March 8 this year, the metals market experienced some serious Sturm und Drang. 

In what has become known as the nickel trading fiasco, the LME, which is owned by Hong Kong Exchanges and Clearing (HKEX), cancelled billions of pounds of business after prices spiked by more than 50 per cent in a matter of hours. 

Ring-side seats: The London Metal Exchange is Europe’s last ‘open outcry’ floor

This potentially saved China’s largest steel company, Tsingshan Holding Group. But, in the process, it enraged the world’s most feared hedge fund, Elliott Management, in the process, and entangled investment banking giant JPMorgan. 

The scandal has sparked nearly £400million of legal claims against the LME from Elliott Management and trading firm Jane Street. Both are asking for a judicial review of whether the LME’s actions were legal. 

The Mail on Sunday understands there may be more to come from other aggrieved hedge funds and traders. Court documents and sources close to the matter have revealed the severity of claims facing the LME, which has been accused of withholding private conversations around its controversial suspension. 

Questions are also increasingly being asked of JPMorgan’s role, the MoS understands. A series of investigations have already been launched by groups including the Financial Conduct Authority and the Bank of England to uncover the truth behind the drama. The context for the chaos was a surge in nickel prices. A spike came when Tsingshan had to buy contracts to cancel huge short positions. 

The Chinese buying, alongside supply chain pressures caused by Russia’s war in Ukraine, led to the price of nickel rocketing by 250 per cent in just two days to more than £83,000 a ton. 

The unprecedented price surge landed huge profits for hedge funds and City firms, including Elliott, while mammoth margin calls loomed for those on the losing side, such as Tsingshan. Or so it seemed until the situation turned on its head. 

At 8am, the LME started to suspend trades. However, soon after, it decided to cancel all transactions. If the judicial review claims move forward, they may draw in JPMorgan. The bank has been described by Jane Street as ‘the only relevant broker for the trades in issue in these proceedings’. 

City sources say the short positions could have led to Tsingshan’s collapse, which would have hit JPMorgan hard. Tsingshan was a client of JPMorgan and held loans with the Wall Street lender. A source familiar with the matter added: ‘JPMorgan from the very outset has been named as the main dealer-broker that has been involved in this. Its interest would have been aligned with the cancellations.’ 

Critics say the cancellation of trades benefited the bank. But a source close to JPMorgan said it had no influence over the LME’s decision. Jane Street’s legal claim accepts JPMorgan had to comply with the LME’s cancellation order. 

Results from earlier this year showed JPMorgan set aside a £100million provision to deal with potential losses from the debacle. 

A full High Court hearing has yet to take place between LME, Elliott or Jane Street as permission for judicial review has yet to be granted. Pre-trial sparring has led to fierce criticism of the UK exchange and its alleged withholding of material. Papers show the LME has been accused of not providing ‘a single document by way of disclosure or answered a number of the important questions put to them’. A source said the big unknown is what was the decision-making process and what were the communications within the LME, and between it and other third parties.’ 

The LME, for its part, says it has provided all information the claimants are entitled to, and strongly denies any lack of candour. 

It is understood New York’s AQR Capital is among a raft of other hedge funds evaluating possible legal action over the suspension.

One City lawyer said: ‘They are waiting in the wings to see whether the judicial review will spit out useful factual information.’ 

Cliff Asness, co-founder of AQR, took to Twitter in June to condemn JPMorgan, the LME and its chief executive, Matthew Chamberlain. 

He said: ‘Nice to see that JPMorgan and the Big Shot got out of this whole thing with only scratches. Add in Matty Chamberlain of LME getting his job renewed and it’s just heart-warming to see good things happen to good people.’ 

The LME said it was faced with ‘exceptional market conditions that posed a systemic risk to the market’ on March 8, adding that trades were cancelled ‘fairly’ and in ‘the interests of the market as a whole’. The spokesman continued: ‘The LME therefore continues to consider that Elliott’s and Jane Street’s grounds for complaint are without merit and will defend any judicial review proceedings vigorously.’ 

Elliott, JPMorgan and Jane Street declined to comment. 

This post first appeared on Dailymail.co.uk