Yuan-denominated gold products in HKMEx pipeline
The soon-to-be launched Hong Kong Mercantile Exchange, which cost HK$500 million and took three years to establish, is to introduce yuan-denominated gold products by the end of this year after the US dollar-gold contracts start trading next week, says chairman Barry Cheung Chun-yuen.
Delayed for more than two years originally scheduled, HKMEx was finally granted the approval by the Securities and Futures Commission (SFC) last week and will start trading on May 18 for US dollar-gold futures contracts for physical delivery in Hong Kong.
Investors can pay a minimum deposit of US$1,600 to one of the 16 broker members and trade future contracts via an electronic system.
The minimum investment for each lot is 32 troy ounces. Based on today's gold price of about US$1,400 per ounce, the value would be about US$45,000. Investors would also have to pay 50 US cents per contract and 25 US cents for a clearing fee.
Cheung said he wanted later to introduce another product with the quoted price in yuan but settled in US dollars. He hoped to gain approval for this by the year end. He also wanted the exchange to trade in silver and other precious metals but no timetable had been set for this.
Cheung, a veteran oil executive, announced the plan to set up the exchange at a press conference in mid-2008 during which a video was shown of Financial Secretary John Tsang Chun-wah giving his blessing to the commodities project, even though the SFC had not yet granted its licence.
At this time, Cheung said the HKMEx was originally envisioned as a platform to trade fuel oil and come on stream in July 2009.
It eventually received approval from the SFC last week to start trading on May 18. The products to be traded had also changed substantially to those planned for 2009. Cheung has said he had dropped the plan to trade fuel oil contracts and replaced them with gold futures contracts.
Cheung said that, during preparations, it had been discovered from potential traders there was little demand for oil contracts.
'After a better understanding of the investors, we changed our plan with the market demands. We consider there is a strong demand in gold, silver and other precious metals,' he said.
Cheung denied the delay in launching the exchange had been caused by difficulties in obtaining funding during the global financial crisis. He said that time was needed to establish and test the electronic trading system.
'We had to establish the HKMEx from scratch. We also had to conduct a lot of system testing to make sure the trading would work smoothly. I do not think three years to set up a new exchange is too long,' he said.
Despite the financial crisis, he said the HKMEx still received support from investors such as Industrial and Commercial Bank of China, Cosco, Russian firm EN+ and a local shipping merchant, who each took a 10 per cent stake in the exchange. Cheung and other investors took the rest.
They had spent HK$500 million establishing the electronic platform for the exchange and the rent and cost for the offices in the International Commerce Centre on top of Kowloon Station. Included in the costs was the expense of hiring about 100 staff, which Cheung expected to increase to 150 after trading started.
The HKMEx is likely to face an uphill battle recouping its initial investment and operating costs. It will have to compete with Hong Kong Exchange and Clearing Ltd that trades in gold futures and averaged 178 contracts a day last month. The Chinese Gold and Silver Exchange Society is also involved in gold trading in Hong Kong dollars and is planning to launch yuan-denominated trading.
There are many gold trading shops in Hong Kong while overseas exchanges in London, Singapore and the US also trade in the precious metal.
A membership fee will be paid by the 16 brokers - which has not yet been disclosed.
Cheung is confident of getting decent turnover. 'We are not trading the same products as the HKEx which does not have physical delivery. Our product is also different from Chinese Gold and Silver Exchange Society, which is a spot market.
'I believe we are in a complementary role instead of being competitors,' he said. 'The overseas exchanges' products may not fit the need of Asian investors.'
When HKMEx debuts, its members, including BOCI Securities, ICBC International Futures, Interactive Brokers, Morgan Stanley Hong Kong Securities and OSK Futures Hong Kong, will trade 1kg gold bar futures in US dollars through the electronic trading system, with physical delivery in Hong Kong.
It will be open 15 hours each weekday from 8am, allowing simultaneous trade with commodity markets in Europe and the US.
The three clearing members of the HKMEx are Interactive Brokers (UK), MF Global UK and Morgan Stanley & Co International. All transactions will be cleared through London-based LCH Clearnet.
Cheung said by using an independent clearing house, it meant the HKMEx did not need to bear clearing risks.
He hoped to attract local retail and global institutional investors.