LONDON, June 21 (Reuters) - Hedge fund Elliott Associates and Jane Street Global Trading are suing the London Metal Exchange for $472 million after the LME cancelled nickel trades on March 8, 2022 when prices soared to record highs above $100,000 a tonne in chaotic trade.

The nickel trading debacle was the biggest crisis in decades to hit the world's oldest metals forum. Suspending trade on March 8 last year left consumers and producers without key benchmark prices and damaged the 145-year-old LME's reputation.

The judicial review of the LME's decision to cancel trades started on Tuesday. If the exchange is found to be at fault, a second trial would be held to decide on compensation.

The LME is arguing it had both the power and duty to cancel trades because $19.7 billion of margin calls would otherwise have led to the bankruptcy of multiple clearing members and created systemic market risk.

Following are details about how margin calls work and what would happen in the event of default by an LME member.

HOW DO MARGIN CALLS WORK?

Margin calls are deposits of cash or collateral with the exchange's clearing house, LME Clear, to cover potential losses if a member defaults.

Initial margin is a percentage of the purchase price that members must deposit with LME Clear for their trades.

Variation margin is the difference between the price originally bought or sold at and the current market price or closing price. As prices move up or down the variation margin has to be topped up or cash is returned.

LME Clear calls for variation margin every hour during the day, to be settled within an hour. It also calls for variation margin at the close of business, to be settled by 0900 London time the next working day.

WHAT HAPPENED?

Short position holders sell metal contracts on the LME and long positions buy.

Tsingshan Holding Group, China's largest private stainless steel producer, could not immediately get the cash to meet margin calls on a large short position when nickel prices soared in early March last year.

Tsingshan does not trade directly on the LME as it is not a member.

Its short position would have been built via an LME member using over the counter (OTC) trades, bi-lateral agreements between LME members and their clients.

Members trading with Tsingshan would have held long positions, which can be netted off against other client positions or hedged by selling contracts on the LME, on which they would pay margin calls.

Tsingshan would have had a credit line with members to pay its margins. Once that credit was exhausted, members would have asked for cash.

WHAT HAPPENS IN A DEFAULT?

In the event of a member default, LME Clear takes over the member's portfolio and sells it.

Any losses are initially offset against margins paid by the defaulter, then by LME Clear's default fund.

Separately, LME Clear would contribute an additional 25% of its regulatory capital in the event of a default to cover the losses.

If there is not enough money in the default fund, the clearing house and members must keep topping up the fund until all losses are covered. (Reporting by Pratima Desai; Editing by David Gregorio)