DJ LME Members To Complain Over Nickel Lending Guidance-Sources...

DJ LME Members To Complain Over Nickel Lending Guidance-Sources

By Andrea Hotter
LONDON (Dow Jones)--Several brokers and banks have written or plan to write
letters of complaint to the London Metal Exchange over its recent handling of
the nickel market, industry sources in London told Dow Jones Newswires Friday.

Others banks and brokers said they plan to seek meetings with the exchange to
discuss the issue and are considering whether or not to take the matter
further, including possible legal recourse.

The uproar started when the LME modified its lending guidance for nickel
overnight on June 6-7, stepping in to introduce new levels at which those
holding dominant long positions are required to lend.

But it didn't provide reasons for the modification, which has seen LME nickel
prices fall some 20% since the guidance came into place and inevitably hurt
market longs as they scrambled to exit positions on the way down. Market talk
in London suggests there have been individual nickel market losses of up to $18
million among banks and brokerages holding long positions since the guidance
took effect.

The lending guidance is a measure to prevent trading from becoming disorderly
when one or a consortium of market participants have a dominant long position
in the market.

Prior to June 7, two industry players appeared to be lending at exactly the
same level each day, close to the maximum permitted, traders said. A hedge fund
holding a short position is said by traders to have complained to the exchange
that it was getting squeezed.

The lending guidance soon came into effect, penalizing not just the two
industry players but the entire market, traders noted.

The bull run in nickel had started to falter before the LME intervened, yet
participants were reluctant to risk going short. Declining demand for nickel
from stainless steel mills, most recently seen with production cuts in China,
and increasing use of nickel pig iron as an alternative to nickel had started
to cause concerns that prices were set to fall.

But the lending guidance was the catalyst for nickel market participants to
change their attitudes, opening the floodgates for a selloff that followed.

What seems to have upset market participants the most is the abruptness of
the change in the LME lending guidance, the lack of explanation for the change
in the rules, and the rationale behind the imposition of lending guidance.

At no point has the LME said the nickel market was disorderly. In an
interview with Dow Jones Newswires published on the same day that the guidance
came into effect, LME chief executive Martin Abbott said the nickel market was
functioning effectively, was not distorted, and reflected macro-economic
realities.

Market players said that the action suggests the LME had cause to suspect the
existence or anticipate the likely development of market abuse, but had stopped
short of saying this openly.

"The LME has moved the goalposts a long way from the playing field on which
people were trading," said the head of trading at one LME brokerage. "There are
no available minutes from the meeting deciding to made this change, so
questions have to be asked," he added.

And the head of another commodities brokerage said that if the LME couldn't
say there was evidence of potential abuse then there was no need for it to act
in the way that it did.

LME spokesman Adam Robinson said that the LME's Special Committee has a
"number of powers to make changes should it see fit."

"Obviously it isn't appropriate to warn market players that we're about to
make changes, but decisions were taken and communicated quickly," he said. "The
nickel market was orderly and we wanted to ensure it remains orderly," he
added.

He declined to comment on the possibility that LME members are considering
lawsuits against the exchange to compensate for the losses made, adding that
such a situation would be confidential.

"The Special Committee will have looked at a whole host of considerations; it
doesn't have to disclose the reasons why it made the change," he said.

There's no reason why a LME member cannot issue a writ against the exchange
should it wish to do so, said David Cliffe, a spokesman for the Financial
Services Authority, which regulates the LME as a recognized investment
exchange.

But Jack Rabinowicz of London-based law firm Teacher Stern Selby, said the
LME may not have published the reasons behind the lending guidance because it
was theoretically possible the market was orderly at the time the change was
made.

"If the market was anticipated to become disorderly but wasn't at the time,
then in theory it would have been defamation if the participants had been named
(by the LME) and the LME said it was launching an investigation into suspected
market abuse," he added.

LME nickel ended the kerb session Friday at $37,650/ton, a 12% drop since the
start of the week.

-By Andrea Hotter, Dow Jones Newswires; +44 (0)20 7842 9413;
[email protected]