Elliott’s lawsuit could give the City’s metal trading scandal a proper airing

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Perhaps the London Metal Exchange only messes with the human rights of the most sympathetic characters?

In 2014, the commodities exchange won a legal battle against Russia’s Rusal, then controlled by oligarch Oleg Deripaska, which had challenged rule changes governing the movement of metal in and out of the exchange’s warehouses. The gist of it was that the LME hadn’t consulted properly on the changes, which hurt Rusal’s economic interests (and infringed its human rights). 

Now the 145-year-old exchange is the subject of a similar suit from two units of notoriously aggressive hedge fund Elliott Management. The judicial review claim argues that the exchange’s March cancellation of trades in nickel, after a 250 per cent surge in the price, was unlawful.

The LME provoked fury among some market participants by first suspending trading in nickel on March 8 and then cancelling trades, in effect resetting the market to where it last deemed the contract was trading in an “orderly” manner. Other lawsuits may emerge from those who suffered losses, given a three-month deadline to submit judicial review claims.

According to the summary from the LME’s owner HKEX, which said the suit was “without merit” and that the LME would “contest it vigorously”, Elliott also claimed that the exchange’s actions “constituted a violation of the claimants’ human rights”.

The admittedly amusing notion of infringing the human rights of an activist hedge fund isn’t as ludicrous as it sounds. So-called A1P1 claims involve the rights of natural or legal persons to “peaceful enjoyment of his possessions”. They are quite often bolted on to other arguments because they are seen as an easier route to damages. (The Rusal case was eventually decided on other grounds.)

Elliott — which appropriately enough has a reputation for chasing every last nickel in long-running disputes — is claiming $456mn, on the basis that the LME’s decisions deprived it of its “property” or gains that it made on sales agreed in the market. That’s roughly equivalent to about 9,000 tonnes of nickel being sold at the reset market price, rather than close to the peak of more than $100,000.

The meat of Elliott’s argument is that the LME overstepped its powers in cancelling trades, or that it exercised them “unreasonably and irrationally”. That could be a nod to concerns about the LME’s slowness in making decisions as the market surged higher on March 7 and 8, or to concerns that the exchange favoured some participants over others, including the Chinese company behind the huge, largely off-market short position that prompted the squeeze. The LME, according to some market sources, has broad discretion under its rule book to take action in such circumstances.

This is a market riven by divergent interests at the best of times. The backdrop to Elliott’s suit is a renewed push to modernise what now seems a hopelessly eccentric market, where vested interests had previously resisted the types of disclosure and limits that might have helped in this situation. The hedge fund’s suit keeps up the pressure for reform.

Large financial participants, such as Citadel whose founder Ken Griffin last week called the exchange’s decision “incomprehensibly wrong”, have long been frustrated by its quirks compared with other futures markets. Big commodity banks were allowed to block greater transparency while profiting from the status quo. Smaller physical traders and members, some of whom previously resisted reform, now seem to concede that safeguards are necessary. They may now find themselves in a battle to preserve the venue’s emphasis on physical trading and hedging, and peculiarities that are valued by the miners and corporates that use it.

Three months after the fact, it remains remarkably unclear who knew what when in this affair, both as nickel prices rose, as reports emerged about missed margin calls in China, and as the LME belatedly intervened. The UK’s financial regulators, who were seemingly AWOL when it mattered, have launched a “review” into a crisis that has certainly hit the market’s reputation, if not worse, in terms of commanding the confidence of its users.

Elliott’s action means this saga could get a thorough going over, sooner rather than later. That may be no bad thing.

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