LME nickel debacle shows need to scrutinise commodities, says IOSCO watchdog

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LONDON – The debacle over nickel trading on the London Metal Exchange (LME) highlights the need for regulators to focus far more on opaque corners of the commodities market, global securities watchdog IOSCO said on Tuesday.

The LME suspended disorderly nickel trading on March 8 for a week after prices doubled to a record above $100 000/t in a few hours on expectations that China’s Tsingshan had to buy metal to cover its short position.

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Russia’s invasion of Ukraine had caused volatility across commodity markets generally and the LME, owned by Hong Kong Exchanges and Clearing, is being investigated by Britain’s regulators. 

“Every crisis has a dimension where we look at something where maybe we should have been looking at a lot harder before the crisis,” IOSCO chair Ashley Alder told the City Week event in London.

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“This time round it’s commodities,” Alder said.

IOSCO groups securities regulators from across the world, such as the Securities and Exchange Commission in the United States and its counterparts in Europe, Asia and Latin America.

“In relation to commodities, a number of issues arose in the aftermath of the nickel trading incident in London.”

Alder, also CEO of Hong Kong’s Securities and Futures Commission, home regulator for LME’s parent company, said the commodities sector was lightly supervised, much of it opaque, and regulation of key actors could be non-existent.

Spot commodity markets are extremely opaque, and regulators need to scrutinise the relationship between commodities futures trading on exchanges, and the far less regulated and less transparent over-the-counter or off exchange sector, Alder said.

There was also the relationship between the futures market and physical delivery of commodities at times of scarcity, he said.

Alder questioned whether banks were fully aware of the risks of extending credit to unregulated players, like producers.

“There is a lot more to say around commodities markets but in practice that’s one area that has been revealed that we need to concentrate on a lot more,” he said.