Elliott Associates has accused the London Metal Exchange of rushing a decision to cancel thousands of nickel trades last year at the start of a court case that will decide if the US hedge fund can seek $456mn in compensation.
The three-day trial at London’s Royal Court of Justice seeks to determine whether the LME acted legally when it cancelled billions of dollars of nickel trades on March 8 last year.
The landmark case will set a precedent that could have ramifications for other financial exchanges and London’s role as a commodity trading hub. It will also lay the groundwork for several other similar cases that have been filed against the LME related to its handling of the nickel market crisis.
The LME’s unusual decision to “wind back the clock” on eight hours of nickel trades on March 8 came after nickel prices surged 270 per cent over three trading days, triggering record intraday margin calls of around $7bn in a single day on March 7.
The Financial Conduct Authority is also investigating the LME over the nickel market crisis, the FCA’s first ever enforcement investigation of an exchange.
Elliott and market maker Jane Street Global Trading argue the LME violated their rights by cancelling nickel contracts, thus allegedly depriving them of their possessions, and are seeking combined compensation of $470mn.
Court documents published on Tuesday depicted a chaotic and at times disjointed decision-making process inside the LME, as the escalating nickel price — and related margin calls — threw the market into crisis.
The claimants allege LME chief executive Matt Chamberlain failed to sufficiently consult with his own committees and market participants before making the decision to wind back the clock.
In its defence, the LME said Chamberlain did consult the senior leadership of the LME before his decision on the nickel trades, and that two dozen senior executives were unanimous in recommending the decision.
The LME says its actions on March 8 “averted significant and systemic damage to the nickel market as well as other metals markets and derivatives markets more widely”.
It added: “In pressing and extraordinary circumstances, the LME at all times acted in accordance with its rules and regulatory obligations and in the interests of the market as a whole.”
Following this week’s trial, the judge will determine whether the LME’s actions were lawful. If they are found to be unlawful, a second trial will be held regarding the level of compensation.
Elliott also accused the LME of “protecting one cohort of market participants at the expense of another, by protecting LME Members (or the LME itself) from the risk of default,” according to the skeleton argument filed by lawyers acting on behalf of Elliott.
“The LME’s function is to allow trading between willing buyers and sellers; it does not include protecting market participants from the consequences of bad trading decisions,” the skeleton argument says.
The LME defence says the exchange was entitled to act for the purpose of system risk, and held a regulatory responsibility to ensure orderly trading.
In their arguments the LME lawyers are also expected to take aim at the hedge funds themselves. “This case concerns derivative traders forgoing speculative profits which they never actually received under commercial arrangements,” reads the skeleton argument submitted by the LME’s lawyers.