The embattled boss of the London Metal Exchange says the banking industry bears some responsibility for the conditions that led to a massive short squeeze that broke the nickel market.
Banks last year lobbied against efforts to increase transparency in metals markets, LME chief executive officer Matthew Chamberlain said in an interview. The proposed changes would have allowed the LME to crack down on the large short position held by Tsingshan Holding Group Co before it caused an unprecedented 250% price spike last week, he said.
Xiang Guangda, the Chinese nickel tycoon behind Tsingshan, has a short position of over 150,000 tonnes, Bloomberg has reported, but only 30,000 tonnes of it is held directly on the exchange. The remainder is held via bilateral, “over-the-counter” deals with banks led by JPMorgan Chase & Co, and including BNP Paribas SA, Standard Chartered Plc and United Overseas Bank Ltd. “The OTC position has caused significant problems for the exchange,” Chamberlain said on Friday. After the LME made a proposal last year to allow the exchange greater visibility of positions held on the OTC market, “it was rebuffed by a number of banks,” he said. “I don’t think we will allow it to be rebuffed again.”
Chamberlain announced in January he would leave the LME to take on a new role at a blockchain startup. In the interview, he refused to say if he would still leave the LME at the end of April as planned. He called for greater regulation of the over-the-counter commodity markets, comparable to measures taken elsewhere in the wake of the global financial crisis in 2008.
“There will now need to be a mature discussion about how the impact of the OTC market on the exchange can be more properly controlled,” he said. “It’s probably a similar discussion to what we’ve seen post-financial crisis in other asset classes. That really hasn’t been applied to commodities. Maybe that needs to be done.”
The LME, which since 2012 has been owned by Hong Kong Exchange & Clearing Ltd, is the ultimate decision maker on changes to its rules. But it must consult with market participants, and generally strives to keep its core members, which include many big banks, happy. The proposal for greater transparency for over-the-counter positions last year came at the same time as the LME was facing an outcry from users over a proposal to close its open-outcry trading floor, “the Ring,” from which it later backed down.
Chamberlain has himself faced furious criticism from users for the exchange’s decisions over the past two weeks, after it allowed nickel prices to skyrocket to more than $100,000 a ton, then suspended trading and retroactively cancelled $3.9bn of trades. The restart of nickel trading since Wednesday has also been hit by a series of glitches in the electronic market.
But the CEO said he was “proud” of how the LME’s management and staff had handled the situation: “They are not the cause of this position, they did not open this position.”
He blamed the misfiring electronic market on “a bug in the underlying third-party software,” and said that if the LME had waited for all such issues to be ironed out it would have further delayed the market’s reopening.
Still, he acknowledged that the exchange would have “a huge amount of work” to do to regain the trust of investors. “I don’t in any way want to understate the understandable anger. I fully understand why people feel that way.”
Responding to a debate in the copper industry about whether Russian metal should continue to be allowed to be delivered to LME warehouses, Chamberlain said the exchange was being guided by government policy.
“Russian metal is not currently sanctioned,” he said. “We understand that that is a deliberate decision by governments, that they do not feel that would be an appropriate action to take at this point.”
He added that a vote at the LME’s copper committee on Friday to recommend banning new Russian copper from the exchange had not been unanimous. “That demonstrates that there is still a variety of views across the industry,” he said “It’s important to note that we have to take on board all of those views.”
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