Copper: Humanity’s first and most important future metal
Millions of feet of copper wiring will be required for strengthening the world’s power grids, and hundreds of thousands of tonnes more are needed to build wind and solar farms.
A stressful week in markets got even worse for some metals traders when the main exchange’s software misfired by generating erroneous margin calls, adding to the chaos at a time when brokers were already bracing for genuine cash requests.
The London Metal Exchange’s clearinghouse produced “a high number” of margin calls in error, according to a note to clients on Wednesday that was seen by Bloomberg News. The incorrect margin requirements for some brokers totaled hundreds of millions of dollars on Wednesday and Thursday, according to two people familiar with the matter, who asked not to be identified.
The issue has now been resolved, the LME said Friday.
“None of these margin calls were released to members due to our system’s built-in margin review procedures,” it said in a statement. “Members were immediately notified of the issue and manual back-up processes were put in place.”
Clearinghouses ask brokers to deposit cash, or “margin,” on a daily basis to cover potential losses on their clients’ positions. In volatile markets, margin requirements go up.
While the LME identified the error and didn’t force anyone to pay the erroneous sums, the mistake couldn’t have come at a worse time.
Metals prices soared this week as exports from Russia, one of the largest producers of nickel, aluminum and copper, slowed and traders rushed to find alternatives.
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That meant many brokers and their clients were facing large actual margin calls. Traders, miners and processors often take short positions on the exchange as a hedge for their physical stocks of metal.
Several brokers and traders said that some brokers have been reluctant to take new short aluminum and nickel positions as a result of the volatility. That helped contribute to a drop in liquidity as nickel prices spiked on Friday, rising as much as 13% to the highest since 2008, with much of the move occurring in a matter of minutes.
On Wednesday, the LME switched from using its automatic system, called LMEmercury, to calculating its members’ margin requirements manually, according to notices sent to members by the clearinghouse.
The exchange’s investigation showed that the problem was caused by a mistake in LMEmercury connected with a U.K. bank holiday on June 2.
“This originally was a valid prompt until the U.K. June Bank Holiday dates changed and therefore the prompt is still in LMEmercury with a historic price,” according to a notice to members.
The issue was particularly acute since the LME’s most actively traded contracts are for delivery in three months’ time, which is currently early June.
(By Jack Farchy, Mark Burton and Yvonne Yue Li)
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