Hedge fund trade group the Managed Funds Association (MFA) filed a formal complaint with the London Metal Exchange (LME) over its handling of the disruption in nickel markets earlier this year.
The MFA’s complaint stems from the exchange’s move to suspend trading in nickel back in March due to “disorderly” market conditions and the subsequent decision to cancel trades made during the market disruption amid concerns about market stability.
In a letter, the MFA said that by failing to impose limits on trading and later cancelling trades the LME violated its regulatory obligation to maintain an orderly market.
It also said the decision to cancel trades negatively impacted certain firms, creating economic losses and/or lost profits.
“This retrospective action by LME, therefore, left market participants in a situation where their nickel exposures — fluctuating heavily in a volatile market — were no longer hedged, leaving those participants exposed to losses,” it said.
The letter alleged that the decision to cancel trades represented a conflict of interest, and that the exchange improperly sought to protect its clearing affiliate, LME Clear.
The complaint called on the exchange to beef up its trade controls, to revise its policies for cancelling trades, and to improve its communication with market players in stressed markets.
It also said the exchange should undertake governance reforms to enhance the independence of its board and to ensure that all market participants “are treated equally.”
“The LME has undermined confidence in its ability to oversee markets by failing to perform its regulatory obligations to maintain an orderly market, manage conflicts of interest and protect investors in the nickel market,” said Jennifer Han, executive vice-president, chief counsel and head of global regulatory affairs at the MFA, in a statement.
“As an important provider of liquidity in the metal markets, the alternative asset management industry encourages the LME to take swift action to redress these regulatory shortcomings,” she added.
The LME has promised an independent review of the episode.
The MFA said a review “is an important step in regaining the trust and confidence of participants in the metals markets,” but it may not address the issues set out in its complaint.