The London Metal Exchange cancelled $12 billion worth of trades when nickel prices went haywire in March 2022 to “save” China’s Tsingshan, lawyers for two financial firms suing the exchange told London’s High Court on Tuesday.
U.S. based hedge fund Elliott Associates and market maker Jane Street Global Trading say the LME unlawfully cancelled trades made on March 8, 2022, after the nickel price doubled in a matter of hours.
The 146-year-old exchange argues it was justified in closing the market and cancelling trades because $19.7 billion of margin calls would otherwise have led to the defaults of multiple clearing members and created systemic risk.
Elliott and Jane Street, which are seeking a combined $472 million in damages, accept the LME has the power to cancel trades in “exceptional cases”.
But their lawyers argued at London’s High Court that the LME had no power to unwind transactions to prevent defaults or tackle systemic risks.
Jane Street’s lawyer James Segan said the LSE had provided a “multi-billion-dollar bailout” to Tsingshan, owned by Chinese tycoon Xiang Guangda, which held large short positions that helped spur the explosive rise in nickel prices.
He said the LME’s actions meant Jane Street was forced to give up profitable trades “to save one person (Xiang) from enormous losses”.
Segan also said that Tsingshan’s “short squeeze” was the main cause of nickel price volatility, a fact he said was “staring the LME in the face”.
LME Chief Executive Matthew Chamberlain, in his witness statement, rejected the suggestion trades were cancelled “in the interests of particular market participants, in particular entities within the Tsingshan Holding Group”.
Elliott’s lawyer Monica Carss-Frisk told the court that the decision to cancel trades was “wholly unprecedented”.
Chamberlain had spent just 20 minutes on his mobile phone scrolling for news and watching nickel prices lurch higher before deciding the market was disorderly, according to court filings.
Elliott and Jane Street say surging prices were fuelled by an LME operations team removing nickel price bands during Asian trading, but the LME says this was not significant.
The two firms also say the LME considered there were rational market forces, such as the impact of potential sanctions on Russia as a result of its invasion of Ukraine, explaining significant price rises on March 7.
However, they argue, it failed to investigate whether increases the following day were also rational.
Elliott argued the LME’s clearing house, LME Clear, could have used a lower closing price of a day earlier to set margins for trades on March 8, which would have resulted in additional margin calls of $570 million instead of $19.7 billion.
Another option was to let the trades stand but adjust the prices, Elliott said, which “would have avoided or adequately mitigated the perceived detrimental effects”.
“The reality is that there were many other tools available to the LME to respond to the events of March 8,” Elliott commodities portfolio manager Thomas Houlbrook said in a witness statement.
The hedge fund said it had executed trades to sell 9,660 metric tons of nickel through Goldman Sachs, JP Morgan and Sigma Broking on March 8.
Houlbrook suggested that “the LME’s own financial exposure” was the reason the exchange decided to cancel trades rather than use its default fund. The exchange denies this, saying its motivation was possible default of LME members and systemic risk for the market as a whole.
The exchange – which is also facing a probe from Britain’s markets regulator over its conduct in the lead-up to the March 8 decision – said the lawsuit raises questions about the viability of regulated exchanges, which have a duty to maintain market order and the power to cancel trades in exceptional situations.
“It is almost inevitable that any exercise of those powers will be controversial,” a filing by the LME said.
“This is territory ripe for opportunistic recrimination and the application of wisdom after the fact.”
The three-day hearing, which is expected to finish on Thursday, is to determine whether the LME lawfully cancelled the trades.