massive trade did not see the exchange

Banks and brokers lend heavily to manufacturers and speculators who like to take a position on modest metal, a key component in stainless steel and electric car batteries.

The exchange in London, where metals traded for 145 years, did not see the increase in danger.

“The simple fact here is that we had no visibility into the size of the risk,” said Matthew Chamberlain, London Metal Exchange chief executive.

The LME’s response to the crisis threatens its dominant position on the global metal market. It happened when the nickel trade spiraled out of control on March 7, then the market suspended and the next morning deleted $ 3.9 billion in transactions, which angered traders who had been betting on the nickel price increase.

The shutdown left Nickel firms helpless for over a week before limited and chaotic trading activity resumed on Wednesday. The market was glitchy, with prices falling to the freshly imposed daily limits of the LME. Some actions have been taken below these levels, including early Friday, leading the LME to cancel more transactions.

“This kind of behavior in a market diminishes its appeal as a free market and as a global pricing mechanism,” said Michael Farmer, a hedge fund manager known as Mr. Copper.

Nickel’s blowup ricocheted through markets. Tsingshan Holding Group, the Chinese nickel maker at the heart of the crisis, owed a $ 4.5 billion collection to banks and brokers for margin payments related to its trade after the LME abolished nickel trading on March 8, people said. familiar with talks between lenders said. . The amount of the charge for banks has not been previously reported.

The banks, led by JPMorgan Chase & Co., including Standard Chartered PLC, BNP Paribas SA and several Chinese banks, are in talks to refinance the trade to prevent further damage. Spokesmen for JPMorgan, Standard Chartered and BNP Paribas declined to comment.

In an illustration of how out of control the market would have been, the London Metal Exchange would not have canceled hours worth of trade and allowed prices to rise to over $ 100,000 per metric ton, Tsingshan would have estimated the group at $ 15 billion owe, trust a person. said with the trade.

As Russia, one of the world’s largest nickel suppliers, invaded Ukraine, metal prices rose on concerns about supply disruptions. That spared Tsingshan billions of dollars in the nickel market. Some of the Chinese manufacturers’ brokers at the LME were furiously trying to get out of the positions by buying nickels, which created a squeeze.

Only 20% of the Tsingshan exposure to nickel was fully visible to the LME, said the person familiar with the trade. The rest of the trade was carried out in private dealers, known as over-the-counter agreements with the banks, according to people familiar with the trade.

Critics of the LME say it should have seen the blast anyway. Tsingshan began to build a large short position last year, and the contours of the trade, if not its size, were well known in the market. Public data on positions shows heavy concentrations of positions of individual players both in the forward market and in the physical neck market, which underlines the trade.

The LME “is asleep at the wheel,” said Andrew Mitchell, director of nickel research at Wood Mackenzie, a consulting firm.

Other factors exacerbated the crisis. The London market lacks protective rails in place on many other exchanges such as circuit breakers or limits to daily price movements. The CME Group’s Comex exchange, which trades in copper and gold, stops trading when prices move 10% within an hour.

The exchange was also slow to trade, allowing trade to continue on March 7, despite a 66% increase in nickel prices, a sign that the market has been turbulent.

The LME dates back to sweet circles around which traders in the early 1800s bought and sold metals as the Industrial Revolution collected steam. An open screaming ring, formed by a narrow circle of red sofas, remains a fixture of the exchange, where traders exchange metals with screams and gestures.

As the demand for metals swelled with the size of the Chinese economy this century, the exchange took on a new prominence and a supply war arose to own it. Hong Kong Exchanges and Clearing Ltd., has established CME, Intercontinental Exchange Inc. It paid a huge premium to the value of the LME shares.

Mr Chamberlain advised Hong Kong Exchanges on the deal as a UBS Group AG banker before moving to the LME. He dominated the LME volunteer culture with a ban on drinking at work in the open-outcry ring. He tried to express travel and strip clubs during the annual LME conference.

One area he did not change was to force brokers to agree on clearer reporting on over-the-counter transactions. Brokers who are members of the exchange have backed down against a proposal for more disclosure, according to LME registrations. She complains about the complexity and cost of such reports.

Tsingshan, meanwhile, has built up a large trade in nickel, which benefits when prices fall. With smelters in China and Indonesia, Tsingshan had the capacity to flood the market with supplies.

In total, the company sold about 190,000 tons of nickel at exchanges and through private dealers with banks and brokers, traders and analysts estimating. At March 7 closing prices, that was worth $ 9.1 billion. Most of these positions were made bilaterally with various banks, not with LME Forward contracts.

Traders are divided over whether Tsingshan simply covered the large quantity of nickel it produced, or whether it made a massive and risky bet on the direction of prices.

Tsingshan’s spokesmen could not be reached for comment.

Mr Chamberlain said the LME would move to set stricter requirements, following the nickel failure. “I think now the LME needs to go in and say these things need to happen,” he said.

The exchange has already stepped up its information exchange challenges in the nickel as well as for the first time setting limits on daily movements. A provisional deal reached by the banks with Tsingshan this week has given the exchange confidence that it could reopen the market.

Nickel traded Wednesday, Thursday and Friday, falling from the maximum amount allowed below new limits, removing some of the pressure on Tsingshan’s traders.

The saga could open the door for rivals CME and Shanghai Futures Exchange. CME is conducting a review of what led to the explosion in the London market to potentially create a nickel contract, said a person familiar with the matter, adding that each launch is a long way off. CME declined to comment.

“We are well aware that last week’s events have damaged our reputation,” said Mr Chamberlain, who is leaving the LME this year to join a crypto-currency firm. “We accept that we have a lot of work to do to ensure we remain the place of choice.”

This story was published by a wire agency feed without any changes to the text