You Won’t Believe How Nickel Trading Shook the LME to its Core in Just One Day!

When Matthew Chamberlain woke up at 5:30am on March 8, 2022 and took a look at metal prices on his phone, he quickly knew something was wrong.

As the CEO of the London Metal Exchange scrolled through his mobile phone – still foggy from dealing with emails until 11pm the night before – he became “alarmed” at how fast the nickel price was rising.

At 5:53 the price of nickel had jumped 30% and was still going up. “I had never seen such extreme price movements,” Chamberlain says in court documents. “I had no doubts that the market had become messy.” Just after 6 a.m. nickel prices had soared past $100,000 a ton, up from $60,000 when he woke up.

Chamberlain checked his inbox, watched the news and made a rough calculation of the intraday margin call his users would be required to pay to keep their trades open at such a steep price tag: more than $10 billion. he estimated.

The actual number turned out to be almost double, enough to push several LME members to the brink of default and pose “systemic risk” to the market, according to Chamberlain’s testimony.

What Chamberlain knew, and when – and how his thinking evolved during that fateful day – are at the heart of a high-stakes legal battle that will determine the future of the LME and has the power to reshape London’s financial markets.

In the case, hedge fund Elliott Associates and market maker Jane Street Global accuse the LME of making hasty and illegitimate decisions during the nickel market crisis of March 8, 2022, and seek compensation of almost half a billion dollars.

Later that day Chamberlain trading suspended in the nickel market, and canceled all nickel trading that had taken place that morning. Elliott says it was forfeited $728 million in gross proceeds as a result of the cancellation.

This article is based primarily on court documents submitted before the trial, including skeletal arguments and witness statements.

With the case underway in London this week, the 146-year-old face-off between hedge funds and the commodity exchange has gripped the City. Its ramifications could extend well beyond the LME itself.

“Everyone is watching him closely,” says Jonathan Herbst, head of financial services at the law firm Norton Rose Fulbright. “If it were to succeed, there would be implications for the whole market,” including other trades, he adds.

At stake is not only the future of the LME, which is also being investigated by regulators for handling the nickel crisis, but also the role of London itself as a financial centre.

In legal terms, the case is unusual because it is a judicial review, a type of lawsuit typically brought against government departments and public authorities, challenging the legitimacy of their decision-making.

In bringing this judicial review against one exchange, the case could set precedents that apply to other exchanges as well, particularly how the leaders of an exchange make decisions in times of crisis.

Inside a crowded and stuffy courtroom at London’s Royal Courts of Justice, the hearing this week has revealed new details on how the LME’s chief executive has handled the crisis and why he decided to cancel retroactively traded $12 billion in nickel on March 8.

The scale of the crisis was already becoming apparent on March 7, when surging nickel prices and record intraday margin calls meant that some LME members were struggling to pay.

The LME took the “extremely unusual” step of deciding to suspend intraday margin calls that afternoon, according to witness statements by Adrian Farnham, chief executive of LME Clear, the clearinghouse.

“In practice, this means that we did not make approximately $2.5 billion of intraday margin calls that would otherwise have been made during March 7. Instead, these amounts were called overnight,” the witness statement said. Farnham.

A key question raised by the complainants is why the LME concluded that the market was “orderly” on the evening of 7 March – despite the red flags and price increases during trading – but decided it was “messy” on 8 March when the volatility continued. That day, rising prices forced the LME to make an unprecedented nine intraday calls to get more margin, totaling $7 billion.

On the morning of March 8, after waking up to the nickel price surging, Chamberlain began receiving calls from LME members saying they might not be able to meet their margin calls, which would technically defaulted on their payments to the LME.

The LME had never before been in a situation where more than one member would be insolvent at the same time, a possibility which looked very real on the morning of 8 March. Not only would this threaten stability in other commodity markets, but it also had the potential to threaten the LME itself, because when a member goes bankrupt, the LME has to step in to hedge those deals.

Previous legal documents show that the LME clearing house default fund he was in grave danger after sudden market movements.

Chamberlain says he called off negotiations to prevent the “systemic risk of multiple concurrent members defaulting,” and that he and his colleagues have considered other options, including doing nothing; and adjusting the deals to a lower price, but he found them unsuitable. The exchange had also considered imposing a daily price cap for nickel the previous day, but decided it was impractical to do so on short notice and submitted it for longer-term consideration.

However, his testimonies also reveal surprising gaps. Chamberlain says he is unaware that the market turmoil has been affected a large short position held by Tsingshanthe Chinese nickel producer, in over-the-counter (OTC) contracts not visible to the LME.

The position was known to the market and reported in media reports on March 8, but Chamberlain says he only learned of it later.

Chamberlain also failed to realize that his colleagues in Asia had overnight removed price bands that normally prevent large swings, which may have contributed to the rapid rise in prices.

The role of the LME’s owner, the Hong Kong Exchange, which bought the LME in 2012, is also in the spotlight in this process. Chamberlain says he has been in contact with HKEX’s chief executive during the crisis and that HKEX colleagues joined several calls on March 8, but did not seek to advise or influence decisions made by the LME, according to witness statements.

In the legal case, Elliott says the LME had better options than canceling trades – such as doing nothing or honoring trades but lowering the margin call – and unfairly favored some market participants over others when it canceled trades.

“It’s really no exaggeration to say that this decision has sent shockwaves through the commodity markets,” said Monica Carrs-Frisk, one of the attorneys representing Elliott, in opening statements in court Tuesday.

Tom Houlbrook, a commodity portfolio manager at Elliott, in written testimony submitted to the court calls the LME’s retrospective cancellation of nickel trades “wholly unwarranted.”

“I think they have exceeded their legal powers [by cancelling the trades]and have both deprived the plaintiffs of their legitimate profit on their trades and materially undermined the integrity and stability of the market which the defendants are responsible for managing,” he says.

LME defense lawyers are yet to speak in court. The exchange said in a statement: “Under urgent and extraordinary circumstances, the LME has always acted in accordance with its rules and regulatory obligations and in the interest of the market as a whole.”

Additional reporting by Rachel Millard, David Sheppard, Jane Croft and Kate Beioley.