Commodities next futures challenge

The Hong Kong Futures Exchange will venture into the wild world of commodities when a link-up with New York Mercantile Exchange (Nymex) gives the territory's traders easier access to gold and oil contracts now traded in New York.

The move, due next year, is aimed at winning business from Chinese companies, some of which have had their fingers burnt trading over-the-counter derivatives in foreign markets.

Introducing commodities trade could also put Hong Kong in greater competition with the Singapore International Monetary Exchange (Simex).

A gold contract has already been introduced on the exchange but the instrument is not traded. Along with several other innovations, it has become part of the graveyard collection of dead contracts that many futures exchanges have.

Ivers Riley, chief executive of the exchange, said the Nymex commodities contracts would be the first traded through the exchange that required physical delivery, unlike the present batch of available instruments, which are settled in cash.

'This is a major departure from what we have done before,' he said. 'That is the reason why it's so important to have a partner (like Nymex) that knows what it is doing.' Professional traders said the energy and metals contracts slated to become available through the exchange over the next year were already traded during Asian hours through brokers offering NYMEX ACCESS - the system to which the futures exchange will link.

As one trader said: 'When we want to trade an oil contract, we just pick up the phone and call New York. We have a broker there with a 24-hour trading desk.' But the link-up should spur more retail activity, traders said, as more Hong Kong houses already trading on the futures exchange might be encouraged to market precious metals contracts here.

Mr Riley said: 'There is already an appetite for the gold contract; there is already a following here.' James Rohan, vice-president of commodities risk management at Union Bank of Switzerland in Hong Kong, explained that making the West Texas crude oil contract available through the Hong Kong exchange could make trade more convenient, but some Singapore-based market sources had different opinions.

'I don't really understand what they are trying to do. If you look at oil products, the market in Asia is in Singapore.' Despite the existence of a similar contract in Singapore, the Hong Kong exchange chose energy and metals as the next target, based on the hedging needs of China.

'The major event triggering this decision is 1997,' Mr Riley said.

Although making the most of the China connection appears a sound strategy, some traders expressed doubts.

One market source in Singapore said: 'China may lack good regulatory controls at present, but when it's ready it certainly will not lack the entrepreneurial drive to start a strong market or even a speculative fever.'