London (Reuters) - Lawyers for two financial firms told London's High Court on Tuesday that the London Metal Exchange cancelled $12 billion worth of deals in March 2022 when nickel prices were out of control to "save" China's Tsingshan Steel.
Us-based hedge fund Elliott Associates and market maker Jane Street Global Trading said the LME illegally cancelled the March 8, 2022, trade after nickel prices doubled in a matter of hours.
The 146-year-old exchange argued that closing markets and cancelling trades was justified because the $19.7 billion margin call would have caused multiple clearing members to default and created systemic risk.
Elliott and Jane Street are seeking a total of $472 million in damages, acknowledging that the LME has the right to cancel the deal in "exceptional circumstances."
But their lawyers argued at London's High Court that the LME had no authority to unwind the deal to prevent a default or address systemic risk.
James Segan, a lawyer at Jane Street, said the LSE had provided a "multi-billion dollar bail-out" to Tsingshan. Tsingshan is owned by Chinese tycoon Xiang Guangda, who has taken a large short position that has helped fuel the explosive rise in nickel prices.
He said the LME's action meant Jane Street had been forced to walk away from profitable trades "to save a man [to]... Against great loss."
Segan also said a "short squeeze" at Castle Peak was the main cause of nickel price volatility, a fact he said was "shining a light on the LME".
In his testimony, LME chief executive Matthew Chamberlain rejected suggestions that the deal was cancelled "for the benefit of specific market participants, in particular entities within the Tsingshan Holding Group".
"Unprecedented"
Monica Carss-Frisk, a lawyer for Elliott, said in court that the decision to cancel the deal was "completely unprecedented".
According to court documents, Mr. Chamberlain spent just 20 minutes browsing the news on his phone and watching nickel prices soar before deciding the market was in chaos.
Elliott and Jane Street said an LME operating team had removed the nickel price band during Asian trading, contributing to the surge, but the LME said that was not significant.
The two firms also said the LME believes there are legitimate market forces, such as Russia's incursion into Ukraine that could be affected by sanctions, which explains the sharp price rise on March 7.
However, they argue that it failed to investigate whether the next day's rise was also justified.
Other options
Elliott argued that LME Clear, the clearing house owned by the LME, could have used the lower closing price to set the margin for the trade on March 8, which would have resulted in a margin call of $570 million instead of $19.7 billion.
Another option, Elliott said, would be to leave the deal unchanged but adjust the price, which "would avoid or adequately mitigate the expected harmful effects."
"The reality is that the LME has many other tools at its disposal to deal with the events of March 8," Thomas Houlbrook, a commodities portfolio manager at Elliott, said in a witness statement.
The hedge fund said it had executed a deal to sell 9,660 tonnes of nickel on March 8 through Goldman Sachs, JP Morgan and Sigma Broking.
Mr Holbrook said "the LME's own financial exposure" was behind the exchange's decision to cancel trades rather than tap the default fund. The exchange denied this, saying it was motivated by possible defaults by LME members and systemic risk across the market.
The exchange is also facing an investigation by the UK market regulator into its conduct in the run-up to the March 8 ruling. The exchange said the lawsuit raised questions about the viability of regulated exchanges, which have a responsibility to maintain market order and the right to cancel trades in exceptional circumstances.
"It is almost inevitable that any exercise of these powers will be controversial," the LME said in a document.
"This is an area ripe for opportunistic accusations and hindsight wisdom."
The three-day hearing, which is expected to end on Thursday, is aimed at determining whether the LME's cancellation of the trades was legal.
