HKEx says 'cash only' for new products

Exchange operator rules out physical delivery to settle commodities contracts as high rents make it too costly to set up warehouse facilities

PUBLISHED : Thursday, 20 June, 2013, 12:00am
UPDATED : Thursday, 20 June, 2013, 4:52am

The high rent in Hong Kong is not only hurting retailers, but also affecting product launches by Hong Kong Exchanges and Clearing.

The bourse's chief executive, Charles Li Xiaojia, said yesterday that when the exchange introduced commodities products for trading in the city, it would prefer cash settlement over physical delivery.

"Hong Kong rents are so high that setting up warehouse facilities to support physical delivery would be too costly," Li said.

HKEx, which operates the stock and futures markets as well as three clearing houses in the city, completed a deal in December to buy the London Metal Exchange in a bid to branch out into commodities trading.

The LME has licensed more than 700 warehouses in 36 locations across 14 countries for physical delivery of its metal contracts traded in London. Contract turnover at the world's largest metal exchange amounted to US$14.5 trillion last year.

On Monday, the London bourse said it had added Kaohsiung as its ninth port in Asia to accept physical delivery of seven types of metal it dealt in, including primary aluminium, aluminium alloy, copper, lead, nickel, tin and zinc.

Li said HKEx had no plans to introduce the current LME products for trading in Hong Kong but would instead consider newly created commodities products.

"The LME has such a liquid market it would not be easy to transfer the turnover from London to Hong Kong," he said. "It is better to think of new products that can meet the demands of Chinese end users and investors for trading in Hong Kong. These may include yuan-denominated commodities products as China is in the process of internationalising its currency."

Li's comments came in the course of his media briefing about his vision on the local commodities market ahead of the annual "LME Week", which starts tomorrow. This is the first time the event is being held outside London.

HKEx expects about 1,000 visitors from overseas and the mainland for the event. They would include metal producers, commodity end users, commodities brokers and general investors checking out opportunities in Hong Kong and on the mainland, Li said.

"For Hong Kong to develop commodities trading, it needs both the help from the LME in London and policy support from the central government," he said.

"The mainland is now the largest metal producer and consumer and the companies need to hedge their risks. If the mainland government allows these end users to use Hong Kong's commodities market to hedge their risks, it will help the city become a commodities trading centre."