The Financial Conduct Authority and Bank of England will undertake reviews into the governance, market oversight and risk management of the London Metal Exchange after a massive short squeeze led to weeks of turmoil that paralyzed the nickel market.

The LME suspended nickel trading on March 8 after prices spiked by 250 per cent in little more than 24 hours. Most controversially, it then canceled billions of dollars of trades that had occurred, arguing that not to do so would have led to multiple defaults.

The FCA will review the suspension and resumption of the nickel market while the central bank will review the operations of LME’s clearing house, according to a joint statement Monday. The LME said separately it will appoint an independent party to conduct its own review into the events, including “a full forensic review of trading” that could lead to disciplinary action, as well as considering potential measures for market reform.

The U.K. regulators will also engage with firms who held significant positions in the market to assess the effectiveness of their risk management and governance during the period, the regulators said in their statement.

Last month’s short squeeze was focused on Chinese tycoon Xiang Guangda and his company Tsingshan Holding Group Co., which built up a giant bet on lower nickel prices and faced billions of dollars in losses when the market spiked higher. Tsingshan held its position through about 10 banks and brokers, including JPMorgan Chase & Co., Standard Chartered Plc and BNP Paribas SA, Bloomberg has reported.

The exchange has been criticized by investors for its handling of the crisis. While the LME said that the price spike posed a systemic risk to its market, the decision to cancel several hours of trades at the highest prices also served as a bailout of Tsingshan and its banks to the tune of several billion dollars.

“The FCA intends to review the LME’s approach to managing the suspension and resumption of the market in nickel to determine what lessons might be learned in relation to the LME’s governance and market oversight arrangements,” the statement said.

The FCA is responsible for supervision of the LME as a investment exchange, while the Bank of England’s Prudential Regulation Authority is responsible for supervision of LME Clear. The regulators also called for the appointment of so-called skilled persons -- typically consultants -- to conduct a section 166 review.

At the end of a skilled person review the FCA can order the LME to change the way it does business. As it’s not yet an enforcement action, no fines can be levied yet.

Historically, the FCA has tended to leave most of the big decisions and policing of market abuse to the exchange. The last major enforcement action taken by the FCA (or its predecessors) against a company over its activities on the LME was more than two decades ago, in the wake of the Sumitomo copper scandal. 

Separately, the LME said it plans to increase transparency in its markets by forcing members to disclose off-exchange “over-the-counter” positions with their clients. It has been doing this in the nickel since mid-March, but will now extend it to all metals.

The OTC market has come under growing focus following the nickel squeeze, as Xiang held most of his positions off the exchange.  The LME said it had “no visibility” of the large OTC short position in the nickel market prior to March 8.

The LME has also agreed to “strengthen its governance” by appointing additional independent directors, according to the regulators’ statement.