LONDON - Exchanges are in an uncomfortable wait for the outcome of a lawsuit by two financial firms against the London Metal Exchange (LME) for voiding nickel contracts, worried about possible curbs on their ability to react in crisis situations if the LME loses.
Whichever side wins, in the case that wrapped up three days of hearings on Thursday in the wake of a chaotic spike in nickel prices in March last year, the stakes are huge for London's status as a major global financial centre.
If the LME wins the argument, there's potential for angry investors to move their business elsewhere - less convinced by London markets and their governance.
A decision isn't expected for at least a month after judgment was reserved on Thursday.
Several trading firms and investment funds are rooting for US-based hedge fund Elliott Associates and market maker Jane Street Global Trading in their $472-million lawsuit, seeing the case as a key test of whether markets in London are fair.
"If the LME loses then it is going to send shockwaves everywhere," said a regulatory source that declined to be named.
"Every time an exchange or a clearing house makes a decision going forward they could be legally challenged, leaving them exposed to large claims."
The legal action stemmed from $12-billion of nickel trades that the LME cancelled in March last year after it was forced to halt trading when nickel prices lurched higher, doubling in a matter of hours to more than $100 000 per metric ton.
The world's oldest venue for industrial metals says it had no choice but to suspend trading and annul deals because a slew of trading firms would have defaulted, sending a "death spiral" of contagion throughout the financial system.
Legal experts say the court will consider the full enormity of the impact on exchanges in making its decision as Elliot and Jane Street wait to see if they will prevail.
Jonathan Herbst, head of financial services at law firm Norton Rose Fulbright, said he could not comment on which side might win, but said courts are mindful of the wider responsibilities of exchanges.
"Courts have historically been sensitive to the point that exchanges and clearing houses need to be confident of their ability to make decisions in stress situations," he said.
"If it were to succeed, there would be implications for all of the exchanges and clearing houses as they play a key public policy role."
LME REPUTATION TAINTED
Even if the LME wins, its reputation has been dented, having been forced to expose its inner workings to outside scrutiny during the course of the legal process, experts said.
Documents and witness statements revealed what many regarded as sluggish reactions in the weeks leading up to the nickel price eruption on March 8 last year, while at least one WhatsApp exchange was critical of the LME's regulator.
Despite market talk and media articles about large short positions held by Tsingshan Holding Group, the LME failed to launch a probe even though it investigated a previous incident in which the Chinese company wielded a large position in 2019.
Several institutions were alarmed on March 7, and at least one urged CEO Matthew Chamberlain to suspend the market or at least impose price caps, court documents showed.
Even though the nickel price rocketed 85% to a peak of $55 000 a metric ton and one member had failed to pay a huge margin call on March 7, an LME special committee meeting at the end of the day decided the market was still "orderly".
The head of LME Clear Adrian Farnham said in a witness statement: "Nevertheless, at the end of 7 March, I went to bed expecting that the nickel price would come back down from the level it had reached."
While other exchanges might breathe a sigh of relief if the LME wins, it could be somewhat of a pyrrhic victory if it erodes trust in London's financial markets, experts say.
"It could make the UK a less attractive place to do business," said a regulation expert at a bank. "Funds could easily go to another jurisdiction."
Elliott and Jane Street said cancelling the billions of dollar of nickel deals sets a bad precedent because exchanges should not interfere in trades agreed by willing buyers and sellers.
"Funds will say London lost control and we are better off trading in the U.S., it is safer, they have more respect for free markets," the regulatory source said.
That source said the two judges in the case could take a middle road in the case, which is a judicial review, looking at whether the action taken by a public body was lawful.
They could say the LME had the right to cancel the trades, but decline to rule on whether they went about it the right way, leaving that to the civil courts, the source added.
The decision of the two judges is not expected to be known for some time and the likelihood of an appeal by the losing side could mean the conclusion is delayed.
The LME is owned by Hong Kong Exchanges and Clearing.