Central clearing and trade cancellation: the case of London Metal Exchange nickel contracts on March 8, 2022

John Heilbron

Journal of Financial Market Infrastructures

Abstract: In March 2022, nickel prices on the London Metal Exchange (LME) nearly quadrupled in just three trading days, threatening to put several clearing members into default and exhaust the default fund at LME Clear, the exchange’s central counterparty (CCP). The LME responded in an unprecedented fashion, by cancelling eight hours of nickel market trades. Though challenged in court, its authority to do so was ultimately upheld. This paper documents the market stress and LME’s response in order to understand the implications of the trade cancellation decision for financial stability and CCP powers going forward. While LME’s trade cancellation helped to alleviate distress, its decision runs counter to the function of a CCP, which is to ensure contract performance. In upholding LME’s right to void contracts, the court’s verdict could change how CCP rule books are applied under financial distress, potentially creating scope for moral hazard or other adverse consequences.

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