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Bank of England announces supervisory action on LME Clear

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In April 2022, the Financial Conduct Authority (FCA), the Prudential Regulation Authority (PRA), and the Bank of England (the Bank) 1 issued a joint statement regarding the London Metal Exchange’s (LME) decision to suspend trading on its nickel market on 8 March 2022 and cancel trades. This in turn resulted in a cessation of clearing of new nickel trades at LME Clear during the period that trading of nickel was suspended on the LME. The subsequent market disruption undermined confidence in the functioning of the nickel market.

The Bank reviewed the operation of LME Clear during the period following the nickel events to determine whether lessons should be learned in relation to LME Clear’s governance and risk management. The Bank was assisted by the appointment of a skilled person, under section 166 of the Financial Services and Markets Act 2000, to conduct a targeted independent review into events at LME Clear, with the scope agreed by the Bank. LME Clear and LME jointly also commissioned Oliver Wyman to conduct an independent review into the factors that contributed to nickel market conditions in March 2022. Collectively, these reviews pointed to several shortcomings across LME Clear’s governance, management and risk management capabilities. In response, LME Clear will need to strengthen its governance arrangements, increase independence in management and governance at the CCP, and improve on its wider risk management.

1 The Financial Conduct Authority (the FCA) is responsible for supervision of the LME as a recognised investment exchange, while the Bank of England (the Bank) is responsible for supervision of LME Clear as a central counterparty. The FCA and the Prudential Regulation Authority (the PRA) are responsible for the supervision of several regulated banks and investment firms who participate in the LME’s markets.

The Bank expects LME Clear to appropriately address all of the findings from the reviews and welcomes LME Clear’s stated commitment to the publication of its implementation plan and timely execution thereafter, which the Bank will monitor closely.

Recognising the importance of the timely implementation of the remedial actions to enhance the resilience of LME Clear’s clearing services and maintain public confidence in the stability of the UK financial system, the Bank intends to use its statutory powers under section 166 of the Financial Services and Markets Act 2000 to appoint a skilled person to independently monitor, assess and report to the Bank regularly on LME Clear’simplementation progress against remedial actions. The Bank will incorporate those reports into its supervisory strategy for LME Clear.

The Bank continues to work closely with the FCA in its capacity as supervisor of the LME where remediating actions are also relevant for LME.

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