BoE instructs LME Clear to strengthen governance and risk management
03 March 2023 UK
Image: AdobeStock/as a CCP
The Bank of England (BoE) has highlighted shortcomings in LME Clear’s actions relating to its suspension of clearing activities for nickel trades in March 2022 and deficiencies in its governance and risk management.
As a result of the BoE’s review, LME Clear has been instructed to improve its governance arrangements, to raise levels of independence and management standards at the central counterparty, and to strengthen its risk management framework.
The Bank’s findings, published today, follow an inquiry into the London Metal Exchange’s decision to suspend trading in its nickel market on 8 March 2022 and to cancel trades.
Following this action, LME Clear ceased clearing in nickel contracts over the period when nickel trading was suspended on the exchange.
The BoE indicates that it has reviewed LME Clear’s operations “over the period following the nickel events” to establish whether further lessons should be learned relating to LME Clear’s governance and risk management.
This review was conducted with the assistance of a skilled person, in accordance with Section 6 of the Financial Services and Markets Act 2000.
The Bank also commissioned research and consultancy firm Oliver Wyman to deliver an independent review of the conditions that gave rise to these specific conditions in nickel markets during March 2022.
On the basis of its conclusions, the BoE expects to apply its statutory powers to appoint a skilled person to monitor, assess and report on LME Clear’s progress in implementing the required changes.
According to a recently published report by the Financial Stability Board, The Financial Stability Aspects of Commodities Markets (FSB, 20 February 2023), traders with short exposure to nickel faced huge margin calls as the nickel price climbed by 69 per cent in one day on 7 March and by over 270 per cent in the three trading days to 8 March. Between 4 and 7 March, clearing members posted more than US$16 billion in margin to LME Clear.
As supervisors of LME Group activities, the Financial Conduct Authority (FCA), the Prudential Regulatory Authority (PRA) and the Bank of England released a joint statement in April 2022 on the LME’s decision to suspend nickel trading on 8 March, promising a subsequent inquiry and discussion with LME regarding how the events of March 2022 in nickel markets should shape its future approach to market structure.
This statement reported that the LME has agreed to the benefits of appointing further independent directors on its board and to additional steps to improve its governance.
As a registered investment exchange, LME’s activities are regulated by the FCA.
As a CCP, LME Clear is regulated by the Bank of England.
As a result of the BoE’s review, LME Clear has been instructed to improve its governance arrangements, to raise levels of independence and management standards at the central counterparty, and to strengthen its risk management framework.
The Bank’s findings, published today, follow an inquiry into the London Metal Exchange’s decision to suspend trading in its nickel market on 8 March 2022 and to cancel trades.
Following this action, LME Clear ceased clearing in nickel contracts over the period when nickel trading was suspended on the exchange.
The BoE indicates that it has reviewed LME Clear’s operations “over the period following the nickel events” to establish whether further lessons should be learned relating to LME Clear’s governance and risk management.
This review was conducted with the assistance of a skilled person, in accordance with Section 6 of the Financial Services and Markets Act 2000.
The Bank also commissioned research and consultancy firm Oliver Wyman to deliver an independent review of the conditions that gave rise to these specific conditions in nickel markets during March 2022.
On the basis of its conclusions, the BoE expects to apply its statutory powers to appoint a skilled person to monitor, assess and report on LME Clear’s progress in implementing the required changes.
According to a recently published report by the Financial Stability Board, The Financial Stability Aspects of Commodities Markets (FSB, 20 February 2023), traders with short exposure to nickel faced huge margin calls as the nickel price climbed by 69 per cent in one day on 7 March and by over 270 per cent in the three trading days to 8 March. Between 4 and 7 March, clearing members posted more than US$16 billion in margin to LME Clear.
As supervisors of LME Group activities, the Financial Conduct Authority (FCA), the Prudential Regulatory Authority (PRA) and the Bank of England released a joint statement in April 2022 on the LME’s decision to suspend nickel trading on 8 March, promising a subsequent inquiry and discussion with LME regarding how the events of March 2022 in nickel markets should shape its future approach to market structure.
This statement reported that the LME has agreed to the benefits of appointing further independent directors on its board and to additional steps to improve its governance.
As a registered investment exchange, LME’s activities are regulated by the FCA.
As a CCP, LME Clear is regulated by the Bank of England.
← Previous industry article
Global securities lending revenue up 34% YoY for February, says DataLend
Global securities lending revenue up 34% YoY for February, says DataLend
NO FEE, NO RISK
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
