The London Metal Exchange asked a High Court judge to respect its “specialist” judgment and refuse payment of $456m and $15.3m, respectively, sought by activist hedge fund Elliott Management and market maker Jane Street over cancelled nickel trades in early March.
The view from the LME in the 13 July court filings — still in the early stages of a judicial review in which a judge must decide whether the lawsuits can go to full trial with the matter — gives insight into the direction the LME’s defence might take.
After facing wide criticism for its decision in March to cancel close to $4bn in trades — and an estimated $1.3bn haul for some funds — the exchange was hit with two lawsuits from Elliott and Jane Street last month.
This is in addition to a joint external regulatory probe by the Financial Conduct Authority and the Bank of England, who are reviewing the LME’s handling of the nickel squeeze that took place, leading to the cancelled trades on 8 March.
In the papers, which include sister company LME Clear — which the exchange consulted in the course of deciding how to respond to the nickel squeeze — the LME said it faced “unprecedented market conditions” on the morning of 8 March.
“In the exercise of its expert judgement, it reached the view that the nickel market was disorderly,” the LME said. On that basis, it made the call to “take appropriate action” to protect market stability and integrity with its decision to “wind back the clock” from 08.15 to midnight on 8 March to set aside trading activity that had taken place in that time.
The price movements on 7 March were “very substantial” and required LME Clear to issue margin calls in the morning, the exchange said in the filings.
The last increase on the day, at around 1pm, pushed the intra-day margin recruitment to approximately $7bn, nearly three times the record increase set on Friday, 4 March.
Some clearing members expressed concern to the LME about whether they would be able to meet their margin call requirements, the exchange said, and some were late paying them.
“LME Clear decided not to issue any further margin increases after 13:00 in order to avoid exacerbating market liquidity issues,” the exchange said.
Had the LME not erased trading, the exchange estimated the cumulative margin requirement would have been $19.7bn – 10 times what it was on 4 March and three times the requirement the day before.
Both Elliot and Jane Street contend that the LME acted “irrationally” when it cancelled trades, arguing what the LME did was unprecedented. The LME response was that its actions should be judged on the specific circumstances of early March and not on what other exchanges have done in the past.
It also noted that the action it took was “within its powers, and those powers were exercised fairly and compatibly with its published policies”.
The LME noted that its status as a ‘Recognised Investment Exchange’ means it is “required to have the power to cancel, vary or correct transactions in exceptional cases”.
The exchange said contentions by Jane Street and Elliott — that the LME was not lawfully free to exercise the power to cancel transactions beyond the scope of its published policies, are wrong “in law and fact”.
The exchange said it was well aware that any move to cancel transactions would adversely impact some traders and benefit others.
“The LME was not seeking to favour one class of market participant over any others, and as such it did not consider it to be necessary (or possible) to explore the extent to which any individual parties would ‘win’ or ‘lose’ as a result of the decisions it was considering,” it said.
The damages sought by Elliott and Jane Street amount to lost profit, at most, the LME said.
In the case of Elliott, the LME said there were no executed contracts cancelled, unlike Jane Street. It also noted that the hedge fund had not established that it had any crystallised proprietary rights, or possessions, among its contracts.
A spokesperson for the LME noted the exchange acted in the interests of the market as a whole on 8 March.
“The LME therefore continues to consider that Elliott’s and Jane Street’s grounds for complaint are without merit, and the LME will defend any judicial review proceedings vigorously,” the spokesperson said.
Elliot and Jane Street were approached for comment.