The London Metals Exchange rescued Xiang Guangda but lured Paul Singer and Elliott Management
Russia produces around 12% of the world’s nickel and 20% of the most demanded pure nickel as vehicle electrification increases. On the day itself, the price more than doubled from under $50,000 to over $100,000.
For months, a self-made Chinese billionaire, Xiang Guangda, had been building a massive short position in the metal. His Tsingshan Holdings, China’s largest stainless steel group and one of the world’s leading nickel producers, had used the LME and OTC derivative contracts with banks to hedge its physical exposure to nickel prices.
When the price exploded on March 8, this position was underwater by billions of dollars and he and other short sellers were facing extraordinary losses and massive margin calls. If his positions had been closed because he didn’t have the money to cover the calls, he would have lost billions.
If trading had been allowed to go ahead, some LME members could also have been devastated by the inability of their clients to meet margin calls and the LME clearinghouse, which stands behind the trades, might have be had to fill in the gaps. from the default values. The clearinghouse, like the LME, is owned by Hong Kong Exchanges and Clearing.
In theory, the losses suffered by Xiang Guangda should have been compensated by the physical production of nickel from Tsingshan, but the LME contracts, which can be settled by physical delivery, relate to pure nickel while its production is of lower quality. The most immediate problem was the immediate need for huge sums of money to meet margin calls, which he did not have.
There were parties on the other side of these trades that could make huge profits by going “long” on nickel as the price skyrocketed. It turns out Elliott was one of them, probably the biggest of those who saw around $1.3 billion in paper profits evaporate as a result of the LME ruling.
The LME chose to protect short sellers, its own members and itself when it decided to call off all trades on March 8 rather than let the profits and losses fall where the contracts required.
He said he did so because the nickel price spike posed a systemic risk to the market and the trade write-offs were done retrospectively to bring the market back to the last time the LME could be sure that was trading in an orderly fashion. .
His critics say he undermined the integrity of the market – Elliott says he acted illegally and violated his human rights (property rights) – undermined trust in the market, exposed participants to the market at losses by his actions and was the product of his conflicts of interest.
The latter refers, not only to the decision to save some of its brokers, but to the impact on its subsidiary, LME Clear, and its parent company, Hong Kong Exchanges and Clearing.
The founder of one of the world’s largest hedge funds, Clifford Asness of AQR, described the LME as “balls of slime” and accused it of reversing trades “to save your favorite buddies and steal your non-friendly customers”. The LME has denied suggestions that Hong Kong Exchanges and Clearing played a role in its decisions.
There is no doubt, however, that the exchange’s decision protected short sellers, its own brokers and clearinghouse, and traders who hedged physical production with short positions in purely financial players like Elliott and Jane. Street Capital who held the long positions.
The LME said one of its main responsibilities was to serve physical traders but, once it opened the market to financial players and encouraged them to provide depth and liquidity, its main responsibility – as is the case with any stock trader – was operating a fair market for all participants.
The decisions taken by the LME in March are now being scrutinized by a host of London regulators – the Financial Conduct Authority, the Bank of England and the Prudential Regulation Authority – and even the International Monetary Fund has played its part, saying the mechanisms of governance for the LME needed to be strengthened to deal with conflicts of interest. The High Court of the United Kingdom will now have, thanks to Elliott and Jane Street, the opportunity to intervene.
The LME is pushing for greater transparency for trading on its exchange and over-the-counter markets to try to avoid a similar event in the future while potential rivals like US group CME debate whether they should try to exploit the moment to challenge the LME. historic stranglehold on the nickel trade.
As for Xiang Guangda, he apparently closed about half of his short position (the price of nickel fell back below $29,000 a ton), is negotiating to swap some of his nickel for the pure form traded on the LME and would have been lining up new facilities with its banks.