LME hit by $450mn lawsuit from Elliott Management over nickel market chaos

US hedge fund Elliott Management is suing the London Metal Exchange for more than $456mn over its decision to cancel nickel trades in March after an unprecedented surge in the price of the metal.

The judicial review claim was filed against the LME and its clearing house last week, according to a statement issued on Monday by Hong Kong Exchanges and Clearing, the LME’s parent company.

LME will contest the claim “vigorously” and views it as “without merit”, HKEX said. It has 21 days to file a response — at which point a UK court will decide whether there is a case to hear.

The legal action heaps further pressure on the 145-year-old exchange, which is battling to repair its reputation as UK financial regulators examine its handling of the crisis.

The decision to suspend trading on March 8 came after nickel surged as much as 250 per cent in just two days to trade briefly above $100,000 a tonne. The violent price spike was triggered by a short squeeze as banks and brokers rushed to close part of a large position amassed by Xiang Guangda, the billionaire founder of China’s leading stainless steel producer Tsingshan Holding Group.

Elliott alleges the LME “acted unlawfully in that it exceeded its powers when it cancelled those trades, or that it exercised the powers that it did have unreasonably and irrationally”.

It also claims that the LME considered “irrelevant factors (including its own financial position)” and failed to take “other relevant factors” into account when it made the decision.

The $456mn being claimed by Elliott is roughly equivalent to about 9,000 tonnes of nickel being sold at $50,000 a tonne — the price nickel was reset at after the trades were cancelled — rather than the peak of $100,000 it hit on March 8. Nickel is now trading at almost $29,000 a tonne.

The LME’s decision to erase a day of trading because of the price surge — which it claimed pushed several smaller members of the exchange to the brink of failure — provoked uproar among some traders who saw their profits wiped out by the move.

Other lawsuits could emerge from other hedge funds that incurred losses on March 8, with a three-month deadline to submit judicial review claims set to expire on Wednesday.

AQR Capital Management, one of the world’s largest hedge funds, was exploring its legal options, people familiar with the matter said in March. The fund’s founder accused the LME of “reversing trades to save your favoured cronies and robbing your non-crony customers”.

LME has denied that parent company HKEX influenced its decision.

LME has said that one reason it did not react earlier to the nickel price squeeze was that it did not know just how much business was being done over-the-counter via derivatives.

Its chief executive Matthew Chamberlain is trying to push through a plan for more regular reporting of these positions in all of the LME’s physically delivered metals. However, members have resisted similar moves for greater transparency in the past.

Under its rule book, the LME has the power to suspend trading and cancel trades in the “interest of maintaining a fair and orderly market”.

Sarah Taylor, a partner at law firm HFW, said it would be difficult to show that the LME’s decision to suspend trading of its nickel contract was “capricious” given the price volatility, but the cancellation of trades could be different.

“The basis of the decision to cancel those trades has been questioned and it has been suggested the decision was prompted by the interests of the LME’s parent company HKEX,” she said.

As a regulated exchange the LME can be subject to judicial review. In 2014 it saw off such a legal challenge from Rusal, the Russian aluminium producer, over reforms to its warehouse system.

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