Banks must learn lessons from the nickel crisis, warns the regulator

Banks must learn lessons from the nickel crisis to avoid similar risks arising in the future, according to a top UK regulator.

The Prudential Regulation Authority’s chief executive of authorizations, regulatory technology and international supervision, Nathanaël Benjamin, said that while the rise in prices on the London Metal Exchange and the subsequent brief squeeze that caused the suspension of trading in March “had left some banks with bruises”. “, those who do not properly manage counterparty risk could suffer a much worse fate in the future when markets are more challenging.

The size and speed of the margin calls could have threatened the stability of the entire market, according to the LME, which decided to eliminate $4 billion in trades as a result. Some banks had been left with “just shame, but not much else,” Benjamin added.

“However, the window for investment banks to finally learn the lessons of properly managing counterparty risk is closing fast. And next time, in rougher waters, those that haven’t may they can’t get away with just a few bruises.”

Speaking at an event organized by trade body UK Finance on July 20, Benjamin said: “A common feature of periods of stress has sometimes been the insufficiency of initial margins required by over-the-counter investment banks. The rising nickel markets in March 2022 reminded everyone that there is a need to move forward here.

“While [clearing houses] they have lessons to learn, so do the banks. When they do not take care of initial margins in benign times, banks give their customers the illusion that some products, for example, hedges, are cheaper than they really should be economically. When banks significantly increase margins at the eleventh hour, as seen recently in commodity markets, customers have to smell the coffee and scramble for cash. And to be clear, these customers should not be expected to be able to find these sums in a short time.”

JPMorgan, Standard Chartered and BNP Paribas were among lenders seeking a deal with Tsingshan Holding Group, the Chinese steel conglomerate that took a major nickel short before prices soared wildly in the wake of the Russian invasion of Ukraine, leaving its banks and brokers on the hook for several billion dollars in unpaid margins, The Wall Street Journal reported.

When asked by the Financial News whether he believed the trading suspension was an appropriate response to the risks, Benjamin said: “The risks I was referring to is how banks have managed their exposures to their counterparties, almost regardless of how much or how little of it was.was cleared centrally and was going through the exchange.

“I’m talking about the over-the-counter side of things. Sometimes there’s maybe a bit of a tendency to say it was the market or the exchanges actually. From our perspective, it’s also important for the banks to learn their own lessons on the OTC This is the relationship of the banks.

“Whenever I talk about very low initial margin and eleventh hour, that’s OTC stuff…obviously there are lessons for all parties, but my problem here is that the banks learn their own lessons and if they do, they will. put everyone in a better place.”

JPMorgan has since completely sold its nickel positions, Bloomberg reported. Legal claims against the LME by hedge fund Elliott Associates and market maker Jane Street over losses they suffered on bets that would have made them millions if they hadn’t been written off are ongoing.

An investigation by the Financial Conduct Authority and the PRA into the decision to suspend trading is also ongoing.

To contact the author of this story with comments or news, email Justin Cash

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About the Author: Chaz Cutler

My name is Chasity. I love to follow the stock market and financial news!