Introduction

In the case of Elliott Associates LP & Anor v The London Metal Exchange & Anor ([2024] EWCA Civ 1168), Elliott Associates LP ("Elliott") challenged the actions of The London Metal Exchange ("LME") and its clearing house, LME Clear ("the Defendants"). The dispute arose from an unprecedented surge in the price of 3M nickel on the LME, leading the exchange to suspend trading and subsequently cancel trades executed during the spike. Elliott contended that this cancellation resulted in significant financial losses and violated both domestic public law and their rights under Article 1 of the First Protocol of the Human Rights Act 1998 ("A1P1").

The key issues in this case revolve around the legality and propriety of the LME's decision to cancel trades during extreme market volatility, the interplay between contractual agreements and public law principles, and the protection of property rights under the Convention on Human Rights.

Summary of the Judgment

The Court of Appeal upheld the decision of the Divisional Court, which had previously dismissed Elliott's claims. The appellate court found that the LME and LME Clear acted lawfully within their regulatory powers to cancel trades amidst an unprecedented market disruption. The court determined that the cancellation was a rational and proportionate response aimed at preserving market integrity and preventing systemic defaults. Additionally, it concluded that Elliott's contractual agreements did not constitute "possessions" under A1P1, thereby negating the claim that their rights were infringed.

The judgment reinforces the authority of regulated exchanges to undertake significant measures, including trade cancellations, to maintain orderly trading conditions under extraordinary circumstances.

Analysis

Precedents Cited

The judgment extensively references landmark cases that have shaped the understanding of public law principles in the context of regulated markets:

• Bradley v Jockey Club: Emphasized the supervisory role of courts in reviewing decisions made by domestic bodies exercising regulatory powers.
• Depalle v France and Ceni v Italy: Clarified the scope of "possessions" under A1P1, distinguishing between enforceable contractual rights and mere expectations.
• Sims v Dacorum Borough Council: Highlighted that contractual agreements specifying powers to cancel do not necessarily infringe on human rights if exercised lawfully.
• Osborn v Parole Board: Reinforced that courts must independently assess whether procedural fairness was upheld in administrative decisions.
• R (Plantagenet Alliance Ltd) v Secretary of State for Justice: Discussed the extent of judicial review over decision-making bodies, emphasizing the importance of lawful and rational exercise of discretion.

These precedents collectively informed the court's approach to evaluating the LME's actions, ensuring that regulatory authorities retain the necessary discretion while adhering to legal standards of fairness and reasonableness.

Legal Reasoning

The court's legal reasoning centered on several key aspects:

• Regulatory Obligations: Under the Financial Services and Markets Act 2000 (FSMA 2000) and MiFID II, the LME was mandated to maintain market order. The extreme price volatility on 8th March 2022 triggered the LME's authority to suspend trading and cancel trades to prevent a cascade of defaults.
• Rationality and Proportionality: The court found that the LME's decisions were rational responses to market conditions that threatened systemic stability. The cancellation of trades was deemed necessary and proportionate to the objective of preserving market integrity.
• Constitutional Rights: Elliott's claims under A1P1 were scrutinized, with the court determining that their contractual agreements did not amount to "possessions" warranting protection under the Convention. The cancellation did not unjustifiably infringe on any protected rights.
• Procedural Fairness: Although Elliott argued that the LME failed to consult affected parties before canceling trades, the court concluded that the urgent nature of the situation justified the swift action taken by the exchange. The opportunity to raise concerns was provided post-cancellation, mitigating claims of procedural unfairness.

The interplay between contractual agreements and regulatory powers was meticulously examined, affirming that compliance with public law obligations takes precedence over private contractual terms in contexts where market stability is at risk.

Impact

This judgment has significant implications for future cases involving regulated exchanges and their capacity to respond to market anomalies:

• Reinforcement of Regulatory Authority: The decision upholds the broad discretion granted to exchanges like the LME to take decisive action in preserving market order, even at the expense of individual contractual rights.
• Clarification of Property Rights under A1P1: By distinguishing between enforceable contracts and contingent agreements, the court delineates the boundaries of what constitutes "possessions" deserving Convention protection.
• Procedural Fairness in Urgent Situations: The ruling underscores that in emergencies, procedural norms may be adapted to allow for rapid decision-making, provided that actions remain within legal and rational boundaries.
• Guidance for Market Participants: Traders and members of regulated exchanges can derive clarity on the extents of their contractual obligations and the circumstances under which exchanges can override trades to maintain systemic integrity.

Overall, the judgment reinforces the primacy of regulatory frameworks in overseeing fair and orderly markets, providing a clear precedent for handling extreme market disruptions.

Complex Concepts Simplified

Article 1 of the First Protocol (A1P1)

A1P1 protects individuals' rights to the peaceful enjoyment of their possessions. It stipulates that deprivation of possessions must be in the public interest and follow legal conditions. In this case, Elliott argued that the cancellation of trades deprived them of valuable assets.

Trading Suspension and Trade Cancellation (TR 22)

TR 22 refers to the LME's Rules that allow for the temporary halting of trading and the cancellation of trades during significant price movements to maintain market order. This power is derived from broader regulatory obligations under MiFID II.

Clearing House and Margin Calls

LME Clear acts as a central counterparty ensuring that trades are executed smoothly by managing the risk of defaults. Margin calls are requirements for members to provide collateral based on current market prices to cover potential losses from adverse price movements.

Legitimate Expectation

This legal principle recognizes that individuals or entities may reasonably expect certain outcomes based on previous actions or agreements. However, such expectations must be firmly grounded in law to qualify as enforceable rights.

Pro-cyclical Feedback Loop

This term describes a situation where actions intended to stabilize a system inadvertently exacerbate volatility. For example, if LME Clear were to close out multiple defaulting positions simultaneously, it could drive prices further up, leading to more defaults.

Conclusion

The Elliott Associates LP v The London Metal Exchange case serves as a pivotal affirmation of the regulatory powers vested in financial exchanges to act decisively during market crises. By upholding the LME's decision to suspend and cancel trades amidst unprecedented price volatility, the Court of Appeal underscored the paramount importance of maintaining market integrity and systemic stability.

The judgment delineates the limits of contractual agreements in the face of regulatory mandates and clarifies the scope of "possessions" under human rights law. For market participants, it reinforces the necessity of understanding and complying with exchange rules that prioritize collective market health over individual contractual freedoms.

Moving forward, this decision provides a clear legal framework for exchanges to address extreme market disturbances, ensuring that mechanisms like trade cancellations are exercised within the bounds of legality, rationality, and proportionality. It also offers valuable insights into the balance between individual rights and the broader public interest in the realm of financial markets.