LME Demands Increased Transparency in Wake of Nickel Squeeze

The London Metal Exchange (LME) has unveiled plans to force its members to provide regular reports detailing their over-the-counter (OTC) metals positions. This move is designed to dramatically expand the exchange's capabilities for surveillance, following the nickel squeeze earlier this year.

The nickel short squeeze happened in March and saw the price of the material hit a record high, briefly exceeding $100,000 (around £81,700) per tonne. This led to the LME cancelling all trades on March 8th, backdating prices to $48,000 (around £39,215) per tonne. Billions of dollars worth of trades were cancelled as a result.

The new move by the LME follows the imposition of emergency limits on daily price moves by the exchange, in an effort to prevent a repeat of the massive rise in the price of nickel experienced in March. The LME is now seeking to expand its surveillance of bilateral deals that are agreed between dealers and clients.

In the wake of the LME nickel crisis, the transparency of OTC markets in the trading of commodities has become the subject of close and growing attention, with dramatic price swings resulting in large margin calls right across the diverse sector. There has been a corresponding increase in demands for regulators to focus more closely at commodity markets and the potential risks they pose to the financial system as a whole.

March's nickel short squeeze centered around a huge short position that was amassed by Tsingshan Holding Group Co., the largest stainless steel and nickel company in the world. The majority of this position was reported to be held with banks in OTC positions; the LME has stated that it had zero visibility of this off-exchange position before the 8th of March, when spiking prices caused it to suspend trading. Harsh criticism has been directed at the LME for allowing the market to be opened on that day before billions of dollars worth of trades were cancelled at the vastly inflated prices.

Commenting on the LME's position, CEO Matthew Chamberlain said: “If we had had data about a very large OTC position, that would have at the very least entered into our thinking in considering what to do, based on the price movement on the Monday. Had we understood that it reflected a very specific effect in the market caused by this large position, then I think the decision could have been different.”

Nickel is a key material in the production of stainless steel and so any changes in the price of one has immediate knock-on effects to the other. You can find out more about the role nickel plays in the production of stainless steel on the BS Stainless website.

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