The London Metal Exchange (LME) was aware of an incident involving Chinese nickel and stainless steel giant Tsingshan's use of the over-the-counter (OTC) trading market back in 2019, LME chief executive Matthew Chamberlain told London's High Court today as part of his witness statement.
Chamberlain was speaking at the court hearing of a case brought against the LME by US-based hedge fund Elliott Associates and trading group Jane Street, who allege the exchange unlawfully cancelled nickel trades that took place on 8 March 2022 after the market turned disorderly and caused benchmark prices to briefly surge past $100,000/t in the space of a few hours.
"Tsingshan had previously come to my attention in 2019 when it had a long nickel position, which a number of participants alleged was abusively squeezing the market," Chamberlain said. "During the course of our investigations [...], we became aware that Tsingshan made significant use of the OTC market."
Tsingshan's vast OTC-held short positions were at the heart of the nickel short squeeze and market collapse last year. But at the time, the LME had no visibility on the OTC market and was unaware that the scale of Tsingshan's positions were escalating a full-blown crisis and bringing the market to breaking point.
Lawyers representing Elliott and Jane Street told the court that knowledge of the 2019 incident with Tsingshan should have provided basis for the exchange to investigate Tsingshan's exposure in the run-up to 8 March last year. Elliott's and Jane Street Global Trading's case centres around the LME's alleged "multi-billion dollar bailout" for Tsingshan, with the two groups claiming the exchange's main aim for the decision to cancel morning trades on 8 March 2022 was to protect the Chinese group from heavy losses.
The LME's lawyer told the court that the LME only received OTC data days after 8 March 2022, and that it could not have moved to investigate Tsingshan on the basis of media reports and speculation about a large short position causing a squeeze.
In his statement, Chamberlain said that Tsingshan's visible positions on the LME itself "were not a particular cause for concern" and not worthy of any further scrutiny at the time.
The LME's lawyer has previously told the court that the 146-year-old exchange's actions to cancel trades were undertaken to protect the market as a whole, given that the price spike on the day of suspension would have resulted in at least $19.75bn of intraday margin calls, putting multiple members into default. Most of the affected trading positions would have had to be taken on by the LME's own clearing house at this point, creating a pro-cyclical feedback loop of further defaults down the road.
Both of the groups bringing the lawsuits agree with the LME that it has the power to cancel trades, but argue that it cannot reverse trades that have already gone through for the purposes of preventing defaults and market risks.
Elliott and Jane Street have taken legal action seeking a combined $472mn in damages, with the hearing entering its third and final day today.
