London Metal Exchange Gets A £9.2 Million Fine From The FCA
Please note that we are not authorised to provide any investment advice. The content on this page is for information purposes only.
The UK financial regulator, the Financial Conduct Authority (FCA) recently fined the London Metal Exchange (LME) £9.2 million after the exchange failed to ensure its systems and controls were capable of dealing with severe market stress.
This penalty made headlines after being the first FCA enforcement action and fine against a Recognized Investment Exchange.
The regulator noted that the price of LME’s 3-month nickel futures contracts encountered extreme volatility between March 4 and March 8 back in 2022, which resulted in the Exchange’s decision to suspend its nickel market. The market was unavailable for 8 days, and all traders involving nickel that took place on March 8 were suspended.
FCA Found Irregularities In LME’s Operations In March 2022
After investigating the issue, the FCA found that the LME did not have adequate controls and systems in place, making it incapable of securing orderly trading under conditions of severe market stress. In fact, LME did not even have adequate controls or policies related to the operation of its automatic volatility controls, or price bands.
Any decisions regarding market orderliness could only be taken by senior managers charged with the responsibility of taking such actions. However, LME’s processes for escalating hazardous or otherwise unusual market conditions to those managers were also found to be inadequate.
The FCA found that only relatively junior trading operations staff members were on duty during the LME’s ‘Asian trading’ hours, which span from 1 am to 7 am GMT. The se staff members did not receive the necessary training to recognize specific market conditions, only to deal with error trades and rogue algorithms.
In other words, when price rises in the nickel contract became extreme in the early hours of March 8, the issue was not escalated to senior members. Instead, the present junior staff members took steps to accommodate price boosts, and they even disabled the price bands when the volatility was at its highest.
Because of these breaches, the price of the exchange’s 3-month nickel futures contracts increased much faster than would otherwise be possible, leading to increased potential exposure of investors and market users to risks that the price bands were supposed to mitigate.
