Analysis: Nerves are on edge as stock markets and funds await the decision in the LME nickel case

• If the LME loses, there will be shock waves
• Even if the LME wins, its reputation will be tarnished – experts
• LME victory could undermine confidence in London financial markets – experts

LONDON, June 23 (Reuters) – Stock markets are anxiously awaiting the outcome of a lawsuit by two financial firms against the London Metal Exchange over the annulment of nickel contracts and are worried about possible limitations on their ability to respond to crisis situations if the LME loses.

Whichever side wins, the stakes for London’s status as a major global financial center are high in the case, which concluded three days of negotiations on Thursday after a chaotic spike in nickel prices in March last year.

If the LME wins the argument, there’s a chance disgruntled investors will take their business elsewhere – less confident in London markets and its governance.

A decision is not expected before a month after the verdict was withheld on Thursday.

Several trading firms and mutual funds are campaigning for US hedge fund Elliott Associates and market maker Jane Street Global Trading in their $472 million lawsuit, seeing the case as an important test of whether London’s markets are fair.

“If the LME loses, it will send shockwaves everywhere,” said a regulator source who asked not to be named.

“Any time an exchange or clearing house makes a decision in the future, they could be challenged in court, leaving them with high claims.”

The legal action stemmed from $12 billion in nickel deals that the LME canceled in March last year after it was forced to halt trading as nickel prices skyrocketed, topping $100,000 within hours -dollars per ton doubled.

The world’s oldest trading hub for industrial metals said it had had no choice but to suspend trading and cancel deals because a number of trading firms had defaulted, triggering a “death spiral” of contagion across the financial system.

Legal experts believe the court will consider the full extent of the impact on stock markets when making its decision, while Elliot and Jane Street wait and see if they prevail.

Jonathan Herbst, head of financial services at law firm Norton Rose Fulbright, said he couldn’t comment on which side might win, but said courts are aware of exchanges’ broader responsibilities.

“Courts have historically been so sensitive that exchanges and clearinghouses have had to have confidence in their ability to make decisions in stressful situations,” he said.

“If successful, it would affect all exchanges and clearinghouses as they play a key role in public policy.”

The reputation of the LME is damaged

Even if the LME wins, its reputation will be tarnished as it will be forced to expose its internal workings to outside scrutiny during the course of the court case, experts say.

Documents and testimonies revealed what many saw as sluggish reactions in the weeks leading up to the nickel price eruption on March 8 last year, while at least one WhatsApp exchange has criticized the LME’s regulator.

Despite market talk and media articles about Tsingshan Holding Group’s large short positions, the LME failed to launch an investigation, although it investigated a previous incident in which the Chinese company held a large position in 2019.

Several institutions were alarmed on March 7, and at least one called on CEO Matthew Chamberlain to suspend the market or at least impose price caps, court documents showed.

Although nickel prices soared 85% to a high of $55,000 per tonne and one member failed to meet a huge margin call on March 7, an LME special committee meeting later that day concluded that the market still “ordered”. .

LME Clear chief Adrian Farnham said in testimony: “Nevertheless, I went to bed at the end of March 7 expecting nickel prices to fall from where they were.”

LONDON’S STATUS?

While other bourses could breathe a sigh of relief if the LME wins, it could be more of a Pyrrhic victory if it undermines confidence in London’s financial markets, experts say.

“It could make Britain a less attractive place to do business,” said a bank regulator. “Funds could easily flow to another jurisdiction.”

Elliott and Jane Street said the cancellation of the multi-billion dollar nickel deals set a bad precedent because exchanges should not interfere in deals agreed between willing buyers and sellers.

“Funds will say London has lost control and we’re better off trading in the US, it’s safer, they have more respect for free markets,” the regulation source said.

This source said the two judges could strike a middle ground in the case, namely a judicial review to determine whether actions taken by a public body were lawful.

They could say the LME has the right to cancel the deals but refuse to rule on whether they did it right, leaving that to the civil courts, the source added.

The two judges’ decision is expected to be announced for some time and the likelihood of an appeal from the losing side could mean that the decision will be delayed.

The LME is owned by Hong Kong Exchanges and Clearing Ltd. (0388.HK).

Edited by Veronica Brown and David Evans

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