In a significant milestone for regulatory enforcement, on 19 March 2025 the UK Financial Conduct Authority (FCA) fined the LME £9.24m for failing to manage extreme volatility in the nickel market effectively. This Final Notice is the FCA’s first enforcement action against a Regulated Investment Exchange (RIE) and underlines the critical importance of robust systems and controls in financial exchanges and regulated businesses.

Background

In a previous article, we discussed the High Court's dismissal of judicial review claims brought by Elliott and Jane Street against the London Metal Exchange (LME). The claims arose from the LME's decision to retrospectively cancel nickel trades made in the run-up to the suspension of trading on 8 March 2022. The Court ruled that the LME's actions were lawful and within its discretion to maintain an orderly market, demonstrating the challenges claimants face when seeking judicial review of decisions by public authorities and their broad discretion. In October last year, the Court of Appeal dismissed an appeal of that decision by Elliott, and on 28 January 2025 the Supreme Court refused permission to appeal, drawing a line under the judicial review claims.

While the LME may have avoided civil claims from disgruntled market users, the FCA has imposed a significant fine on the exchange for failing to ensure its systems and controls were adequate to deal with severe market stress.

The LME

The LME is one of the world's largest commodities markets and constitutes an RIE under the Financial Services and Markets Act 2000. Between 4 and 8 March 2022, the price of the LME's three-month nickel futures contract more than trebled, causing severe market disruption and threatening the default of multiple LME Members. The LME's Trading Operations team in Hong Kong and London struggled to manage the volatility, suspending and reapplying the price bands designed to control extreme price movements. The most significant fluctuation occurred in little over an hour on 8 March, causing the LME to suspend its nickel market for eight days and cancel all nickel trades that took place on 8 March. 

In March 2023 the FCA announced an enforcement investigation into the LME’s conduct and systems and controls in the period between January 2022 and the time of suspension on 8 March 2022.

Summary of the FCA's Findings

The FCA found that there were several critical failings in the LME's systems and controls during the relevant period, including breaches of the requirements in the FCA's Recognised Investment Exchanges sourcebook (REC) and failures to comply with the technical standards relating to organisational requirements of trading venues in Commission Delegated Regulation 2017/584 (RTS 7). The FCA also criticised the LME for failing to bring the relevant breaches quickly, effectively and completely to its attention. 

Key findings included the following.

• Inadequate Controls: The LME's automatic volatility controls, known as "price bands," were found to be insufficient under conditions of severe market stress. The exchange's focus on these controls was too narrow, primarily treating them as a measure against error trades and rogue algorithms, rather than a broader mechanism to ensure orderly trading during extreme volatility. The LME's reliance on email notifications for overnight monitoring, which were not monitored in real-time, contributed to the failure to manage the extreme price movements effectively. This gap in real-time monitoring was a critical factor in the volatility and apparent market disorder.
• Inadequate Escalation: The LME's processes for escalating unusual or hazardous market conditions to senior managers were found to be inadequate. During the most extreme period of volatility, only relatively junior trading operations staff were on duty, whereas decisions about market orderliness could only be taken by LME’s senior management. The additional risks to which overnight trading gave rise were insufficiently managed, and staff did not understand when it was necessary to escalate a situation to senior decision makers. Standard email notifications were sent regarding the price rises overnight, but mailboxes were not monitored.
• Suspension of Price Bands: The LME's decision to suspend the operation of its price bands during the period of extreme volatility allowed the price of its three-month nickel futures contract to increase at a much faster rate than would have been possible otherwise. This decision was made by junior staff without oversight from senior management, exacerbating the market disruption and increasing Members’ potential exposure to significant risk. At no point did the trade operations team in Hong Kong seek instructions from senior managers in London regarding the price band suspension. The LME also did not capture an accurate chronological record of its price band settings and adjustments.
• Written policies and Training: The FCA found significant gaps in the LME's written policies and training programmes. Specifically, the operations team “did not receive specific training on the nature of a disorderly market or how to recognise it” nor were they “trained to recognise that disorderliness could arise in a market that was, from the technical standpoint, functioning properly.” Processes were vaguely drawn, and the LME failed to articulate to its staff the broader purpose of the price bands. 

Mitigating/aggravating factors and penalty calculation

The FCA acknowledged that since March 2022 the LME had taken some steps to address the issues, including commissioning an independent review and implementing an action plan based on its recommendations. These actions were considered mitigating factors. However, the FCA also noted that the LME had provided inaccurate information on several occasions regarding the calibration and suspension of the price bands, which was considered an aggravating factor. 

The seriousness of the breach was assessed at level three (out of a possible five), resulting in a base penalty of £14,676,050. After considering the mitigating and aggravating factors, the penalty was reduced by 10%, with a further 30% discount then applied for early settlement. This resulted in a final penalty of £9,245,900. 

The FCA emphasised that the penalty reflects the seriousness of the breaches, which undermined market orderliness and confidence and – given the LME’s strategic position in the market – presented significant risks to the wider economy.

Implications and commentary

The FCA’s decision serves as a reminder that no regulated market participant is beyond FCA scrutiny and sanction. While it is the first time that a UK RIE has been fined by the regulator, the failings themselves are not novel. At its core, this case is about failings in systems and controls (particularly relating to risk mitigation, escalation and staff training), which meant that the LME was not adequately prepared to deal with a crisis. 

While the FCA delivered its wider market reform to the commodity derivatives regulatory framework alongside this decision, the warnings contained clearly apply not just to financial exchanges but any regulated business. The decision serves as a cautionary tale, emphasising the need for preparedness, robust governance, and rigorous reporting and training.

The FCA’s Enforcement Division has been widely criticised for its lack of efficiency and the pace of its enforcement investigations. It has committed publicly to delivering more streamlined and focused enforcement outcomes in order to maximise market deterrence and avoid burdening firms with lengthy and disproportionate investigations. On one level, the LME fine is a good example of this – as the FCA points out in its press release, the investigation was completed more quickly than the average length of an investigation closed in 2023/2024 (which was 42 months) and it was a complex and economically significant case. While this is a step in the right direction, the incident itself took place in March 2022 – there has therefore been a significant passage of time prior to the enforcement outcome.