An “enforcement investigation” into the London Metal Exchange has been announced by the FCA on the same day as the Bank of England stated its intention to use statutory powers to continue scrutiny of the exchange’s clearing house, LME Clear. The moves come almost a year to the day after LME controversially suspended trading when prices surged 250% in 24 hours.

The FCA is to examine conduct, systems and controls in place at the LME between the beginning of 2022 and March 8, the day on which trading was suspended.

In a short statement, the regulator said it “confirmed an investigation in light of the public interest in these matters and will not make any further comment in line with normal policy”. The statement acknowledged efforts by the LME board to “consider carefully how the events of March 2022 should shape its future approach on market structure, including the role of transparency in facilitating effective risk management”.

Market reform

It also noted that “LME has implemented changes to its control framework and committed to a wider package of market reform, informed by the recommendations of an external review LME and LME Clear jointly commissioned”.

The BoE said it will “use its statutory powers under section 166 of the Financial Services and Markets Act 2000 to appoint a skilled person to independently monitor, assess and report to the Bank regularly on LME Clear’s implementation progress against remedial actions”. And that it would “incorporate those reports into its supervisory strategy for LME Clear”.

The conclusions of the independent review carried out by Oliver Wyman were also referenced in the Bank’s statement. Wyman found “shortcomings across LME Clear’s governance, management and risk management capabilities”, the Bank said, and this meant “LME Clear will need to strengthen its governance arrangements, increase independence in management and governance at the CCP, and improve on its wider risk management”.

Therefore “the Bank expects LME Clear to appropriately address all of the findings from the reviews and welcomes LME Clear’s stated commitment to the publication of its implementation plan and timely execution thereafter, which the Bank will monitor closely.”

Wyman review

In its response, the LME said it “welcomes the FCA’s constructive engagement and comments on the steps taken by the LME since the suspension” and that “the LME and LMEC are each preparing an implementation plan setting out how they propose to deliver against the recommendations of the Oliver Wyman independent review, including the initiatives that are already underway to strengthen their business and markets. This is to be communicated at the end of Q1 2023.”

It also said “active steps are being taken to enhance nickel market liquidity – most notably, the forthcoming resumption of Asian hours nickel trading on 20 March 2023”.