Laura WilesIn its first enforcement action against a UK recognised investment exchange, the FCA has fined London Metal Exchange (LME) £9.2m for failing to have adequate systems and controls in place to deal with severe market stress.
In March 2022, the price of LME’s 3-month nickel futures contract encoutnered extreme volatility, with its price rising to over $100,000 on 8 March 2022, more than double the closing price the day before. Most of this cost increase had occurred in just over an hour. The LME suspended its nickel market for 8 days and cancelled all trades that took place on 8 March.
The FCA found that LME’s systems and controls were not adequate to ensure orderly trading in severe market stress conditions. Specifically, it did not have appropriate controls or policies on the operation of its automatic volatility controls, or ‘price bands’.
Decisions relating to market orderliness could only be taken by designated senior management, but the company’s processes for escalating unusual or hazardous market conditions to those designated individuals were also inadequate: during its ‘Asian trading’ hours (1am to 7am GMT), only junior trading operations staff were on duty, and they had not been trained to identify issues other than error trades or rogue algorithms as potential causes of a disorderly market.
These breaches allowed the price of the 3-month nickel futures contract to rise far quicker than otherwise would have been possible.
The FCA has acknowledged the work undertaken by LME since March 2022 to strengthen its controls in this area.