The Financial Conduct Authority (FCA) has fined the London Metal Exchange (LME) £9.2 million for failing to ensure its systems and controls were adequate to deal with severe market stress.
The penalty is the first FCA enforcement action and fine against a Recognised Investment Exchange
Between 4 and 8 March 2022, the price of LME’s 3-month nickel futures contract encountered extreme volatility, leading the Exchange to suspend its nickel market for 8 days and cancel all nickel trades that took place on 8 March.
The FCA found that the LME’s systems and controls were not adequate to ensure orderly trading under conditions of severe market stress. In particular, LME did not have adequate controls or policies relating to the operation of its automatic volatility controls, its ‘price bands’.
Decisions about market orderliness could only be taken by designated senior managers, but LME’s processes for escalating unusual or hazardous market conditions to those managers were found to be inadequate.
During LME’s ‘Asian trading’ hours, from 1am to 7am GMT, only relatively junior trading operations staff were on duty. They had not been trained to recognise anything other than error trades or rogue algorithms as potential causes of a disorderly market.
This meant that when price rises in the nickel contract became increasingly extreme during the early hours of 8 March it was not escalated to senior LME managers. Instead, trading operations staff took steps to accommodate the price rises, even disabling the price bands, during the most extreme period of volatility.
The LME’s breaches allowed the price of its 3-month nickel futures contract to increase much more quickly than would otherwise have been possible. This increased the potential exposure of investors and market users to risks the price bands were designed to mitigate.
Steve Smart, joint executive director of enforcement and market oversight, FCA says: "London’s metal markets are of vital importance to the UK and global economy. We expect controls that match their significance. The LME should have been better prepared to address the serious risks posed by extreme volatility."
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The LME accepted the findings so qualified for a 30% reduction in its financial penalty.