Mar 31, 2023
LME Moves to Overhaul Nickel Market in Wake of Epic Squeeze
(Bloomberg) -- The London Metal Exchange proposed sweeping changes to its nickel operations, including allowing a new form of the metal to be delivered against its contracts and opening a new spot market in China.
The reforms are part of a broad overhaul designed to strengthen trading after 2022’s short squeeze. They follow recommendations made in an independent review of the nickel crisis, when prices more than tripled in just over 24 hours before the LME halted trading and canceled billions of dollars of contracts.
The exchange is facing a rare probe from the UK’s Financial Conduct Authority over its handling of the debacle, as well as lawsuits from hedge funds who stood to gain from the spike in prices.
The turmoil centered on top producer Tsingshan Holding Group Co., which had amassed a large short position and wasn’t able to deliver nickel against it as prices jumped last March, despite making vast quantities of lower-grade forms of the metal.
The LME plans to expand the forms of nickel that can be delivered against its contracts to include coarse nickel powder, the bourse said Thursday. Tsingshan is looking to boost production of LME-grade metal alongside peers who were also caught out by the squeeze, and the LME said it will fast-track the approval of new brands.
Read: Chinese Group Heads to LME With Plan to Draw a Line Under Crisis
While nickel’s surge was unprecedented in scale, the LME has faced historic squeezes in other markets including copper, zinc, lead and tin over the past few years. In each case, the price spikes came as the volume of stockpiled metal that underpins trading on the bourse dropped to critically low levels.
The exchange introduced a number of emergency measures to limit the impact of the decline in inventories, and will put forward a plan to make them permanent in a market consultation in May.
It will also look to launch a new spot market for nickel sulfate and nickel matte in China. The trading venue will be developed with the China-based Qianhai Mercantile Exchange, which is owned by the LME’s parent, Hong Kong Exchanges and Clearing.
“We are relatively conservative” on the spot platform plan given QME’s weak presence in other spot contract trading, said Zhou Weigang, an analyst with Jinrui Futures Co. Still, “the spot platform will at least provide one more trading option to nickel investors and could make LME trading more rational.”
In terms of the feasibility of the spot contracts, nickel sulfate might be more viable as nickel matte can hardly be standardized due to the complexity of components, according to Xu Aidong, an analyst with Beijing Antaike Information Development Co.
Additionally, the LME plans an overhaul of its clearinghouse, after the Bank of England said earlier this month the system’s risk management and governance need to be improved. Crucially, it will reassess the idiosyncratic way that it calculates the cash that dealers need to post to cover trading losses, and could switch to a so-called realized variation margining model that’s used by virtually every other clearinghouse.
It’s planning to implement the reforms over the next two years. Other key measures include:
- Making daily price limits permanent, with revised limits for copper and aluminum set at 12% per day
- Introducing a monthly report on stocks stored off-exchange in LME-licensed warehouses that are eligible for delivery
- Further initiatives on reporting of over-the-counter positions
- Reviewing clearinghouse membership requirements
--With assistance from Winnie Zhu.
(Update with analysts comments on spot platform in 9th and 10th paragraph.)
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