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Judicial Review Claims Against the London Metal Exchange​

By Jake Rickman​

What do you need to know this week?

This week, hedge fund Elliott Management and market maker Jane Street have each filed a judicial review claim against the London Metal Exchange (LME) within short succession of one another in response to the nickel crisis that happened in March 2022.

The LME is a market for investors to trade commodities like nickel, copper, lead, and zinc, as well as related derivative contracts. Despite being privately owned by Hong Kong Exchanges and Clearing (HKEC), it exercises a public law function because it regulates the trade of metals. As such, it is amenable to judicial review.

Elliott seeks over $450m in damages, while Jane Street seeks more than $15m. Both claims relate to the LME’s decision to suspend trading and reset certain positions following the historic volatility in the price of nickel. For the claims to succeed, the claimants must show that the LME acted illegally, irrationally, or without procedural propriety.

Why is this important for your interviews?

This story draws on several different commercial and legal matters, including commodities markets, market volatility, regulatory disputes, and judicial review claims.

As Bloomberg explains, the commercial basis for the extreme price volatility is based in the first instance on supply chain issues arising from COVID-19: as the market cooled during the various global lockdowns, nickel miners and refiners slowed their exploration and production. When demand picked back up, there was not enough supply, which resulted in increased prices.

A “short squeeze” arose because certain Asian investors’ like Chinese billionaire Xiang Guangda, who had the largest short position at the time of the suspension, had adopted an investment thesis that the increasing price of nickel was unsustainable and would fall in the short-term. However, given Russia’s status as one of the largest nickel exporters in the world, its invasion of Ukraine resulted in even further price increases.

As the price climbed, those with short positions were contractually obligated to either pay further cash to their brokers to cover their position or buy the nickel back at a substantially higher price than expected. As prices surged, the margin in the actual price versus the short position grew massively; soon, many investors were finding it difficult to meet these “margin calls”.

But by suspending trading, the LME effectively permitted the short investors to maintain their positions because the price of nickel could not climb any higher once trading stopped. Elliott and Jane Street allege that this decision unjustly cost them the profits they would have made because of their long positions.

How is this topic relevant to law firms?

We think of judicial review as an area of administrative law, but this case demonstrates that it is also relevant to financial markets. A key issue is HKEC’s alleged proximity to certain investors that benefitted from the suspension. If the claimants can prove that HKEC influenced the LME’s decision, they may win their claims based on procedural impropriety.

Hogan Lovells, Herbert Smith Freehills, and Fieldfisher are well-established firms in both defending and litigating judicial review cases involving financial markets.