Admin Court rejects $12 billion challenge to London Metal Exchange

29/11/23

The Divisional Court (Swift and Bright JJ) has handed down judgment in the case of R (Elliott Associates, Elliott International and Jane Street Global Trading) v The London Metal Exchange and LME Clear [2023] EWHC 2969 (Admin).

The London Metal Exchange (“LME”) is the world’s main centre for the trading of industrial metals, and a “recognised investment exchange” for the purposes of the Financial Services and Markets Act 2000 (“FSMA 2000”). LME Clear is the clearing house for trading on the LME. The Claimants are sophisticated trading and investment firms who traded on the LME’s nickel futures market on the morning of 8 March 2022.

As a recognised investment exchange, the LME benefits from a statutory immunity from claims for damages arising from its performance of its regulatory functions under FSMA 2000, subject to claims under the Human Rights Act 1998. Its conduct is also amenable to judicial review.

The Claimants challenged the LME’s decision to cancel US$12 billion worth of nickel futures trades on the morning of 8 March 2022 in response to disorderly trading conditions on the LME’s nickel market following the Russian invasion of Ukraine (“the Decision”). The Claimants also brought claims under the Human Rights Act 1998, seeking damages in the sum of US$471 million for an alleged disproportionate interference with their ‘possessions’ under Article 1, Protocol 1 of the European Convention on Human Rights.

The Divisional Court rejected the claims in their entirety.

• The Court considered that the LME was entitled to conclude that its market had become “disorderly” in circumstances where the price of LME nickel did not reflect the underlying physical price of nickel in the ‘real-world’ determined by any relevant macroeconomic, geopolitical or other factors [122]. This conclusion was not affected by the fact that the LME nickel market experienced a “short squeeze” on 8 March 2022 [187].
• The LME was also entitled to consider urgent action needed to be taken in response to the disorderly trading conditions [132]. Against that background, the LME acted lawfully in proceeding without seeking representations from the Claimants or more widely as to the appropriate course of action [165].
• The Court rejected the Claimants’ vires arguments, clarifying the scope of the powers conferred on the LME and other recognised investment exchanges under FSMA 2000 and retained EU legislation passed pursuant to the EU Markets in Financial Instruments Directive 2014 [139]-[146].
• One of the LME’s reasons for cancelling trades was that allowing them to stand risked leaving LME Clear under-collateralised, as traders on the LME were having difficulty paying collateral (or “margin”) to LME Clear. The Claimants alleged that this was irrational, as LME Clear could have adjusted the price at which it calculated the level of margin required to ensure that trading on the LME was properly collateralised [198]-[201]. The Court rejected this argument, holding that “[i]n all the circumstances (above all, the ex hypothesi disorderly market on that day) it was impossible to know what the market price was on 8 March 2022” such that the LME and LME Clear could not be criticised for failing to identify such a price [202].
• As for the Claimants’ claims for damages under the HRA 1998, the Court found that the Elliott claimants had no ‘possessions’ which were interfered with by the LME’s Decision, since, at the time of the Decision, they “did not yet have a proprietary interest recognised in law, or any relevant legal interest” [239].
• Jane Street’s damages claim was also rejected, on the basis that, although it had ‘possessions’ in the form of concluded contracts, the Decision did not interfere with those ‘possessions’: as a sophisticated trading firm, Jane Street traded on the LME in the knowledge that trades could be cancelled in accordance with the powers contained in the LME’s rulebook and the underlying regulatory framework [247].

The case was one of The Lawyer’s Top 20 Cases for 2023. The Judgment is here.