The Financial Conduct Authority (FCA) has imposed a fine of £9.2 million on the London Metal Exchange (LME) due to inadequate systems and controls to manage severe market stress.
This marks the first FCA enforcement action and fine against a Recognised Investment Exchange. Between March 4 and 8, 2022, the price of LME’s 3-month nickel futures experienced extreme volatility, prompting the Exchange to suspend its nickel market for eight days and cancel all nickel trades executed on March 8.
The FCA determined that the LME’s systems and controls were insufficient to maintain orderly trading during times of severe market stress. Specifically, the exchange lacked effective controls and policies regarding its automatic volatility controls, known as ‘price bands.’
Decisions about maintaining market order were restricted to designated senior managers; however, the processes for notifying these managers of unusual or hazardous market conditions were found to be inadequate. During the LME’s Asian trading hours (1 am to 7 am GMT), only relatively junior trading operations staff were on duty, and they had not received training to identify issues beyond error trades or rogue algorithms as potential contributors to market disorder.
As a result, when the price of nickel contracts surged dramatically during the early hours of March 8, the situation was not escalated to senior LME managers. Instead, trading operations staff took measures to accommodate the price increases, including disabling the price bands during a particularly volatile period.
These oversight failures allowed the LME’s 3-month nickel futures contracts to rise at a pace far beyond what would normally have occurred, increasing the exposure of investors and market participants to risks that the price bands were intended to mitigate.
Steve Smart, thejoint executive director of enforcement and market oversight at the FCA, commented, “London’s metal markets are vital to the UK and global economy. We expect controls that correspond to their significance. The LME should have been better prepared to address the serious risks posed by extreme volatility.”
The LME accepted the findings, which qualified it for a 30% reduction in the financial penalty.