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Central Clearing and Trade Cancellation: The Case of LME Nickel Contracts on March 8, 2022

Authors: John Heilbron

A new OFR Working Paper by John Heilbron revisits the nickel market stress of March 2022 and the LME’s decision to cancel eight hours of nickel trades. The cancellation of contracts helped members at LME Clear avoid being declared in default, but came at the expense of other market participants, who incurred losses. Future instances of trade cancellation are possible because the UK High Court upheld LME’s authority to cancel trade. The paper argues that trade cancellation runs in tension with a primary function of CCPs, which is to ensure contract performance. If contract cancellation prevents CCPs from losing “skin-in-the-game” capital during episodes of market stress, then CCPs will have less incentive to engage in proper monitoring and risk management.