Hong Kong Exchanges and Clearing Ltd is the holding company for the city’s stock exchange, futures exchange and clearing company. Its market capitalisation made it the world’s biggest listed bourse as of the end of 2012. In December 2012, the HKEx clinched the US$2.2 billion takeover of the London Metal Exchange, the world's biggest marketplace for industrial metals.
HKEx commodity push faces uphill battle
Bourse may have difficulty luring investors away from well-established and liquid markets overseas to trade products on its new platform
Brokers believe Hong Kong Exchanges and Clearing will face an uphill battle to promote its four commodity products to be introduced later this year mainly because investors are used to trading these products overseas.
HKEx said last week that it would launch yuan-traded copper, aluminium and zinc contracts and a thermal coal contract to be traded in US dollars on its commodity platform later this year.
The bourse bought the London Metal Exchange, the world's biggest physical metal bourse, in 2012 to diversify beyond stock and financial futures trading. The new platform is its latest effort to promote commodity trading in the city and prepare for a tie-up with mainland exchanges through a potential commodity through train scheme similar to the one linking Hong Kong and Shanghai stock exchanges from October.
Ben Kwong Man-bun, the chief operating officer of KGI Asia, said his firm traded commodities for customers in the LME or the Chicago Mercantile Exchange in the United States.
"Quite a lot of Hong Kong investors are interested in trading commodities overseas. They would be potential clients of the Hong Kong platform if HKEx has incentives to attract them," Kwong said.
"However, this would not be easy as these investors have got used to trading in the LME or the CME where the commodities markets are well-established and have deep liquidity. HKEx would need to prove its market also has good liquidity and low trading cost to get investors to shift back to the city."
Sun Hung Kai Financial executive director Joseph Tong Tang echoed the observation and said many clients trading in the LME might not be interested in changing their trading venue.
"The commodities market is a new concept to many Hong Kong investors. Those who are trading in the stock markets would not shift to commodities easily. Investors who trade commodities overseas would not have great interest in shifting from a very liquid market in London or the US to trade in a newly set up market here," Tong said.
The three metal contracts to be traded in yuan may pose another challenge.
Christopher Cheung Wah-fung, lawmaker for the financial services sector, said Beijing had not yet removed the 20,000-yuan (HK$25,120) daily cap for Hong Kong individuals to exchange Hong Kong dollars or other currencies into yuan.
"This restriction would make it difficult for investors to get the yuan to trade these yuan-denominated metal contracts," Cheung said.
Brian Fung Wei-lung, director of Kaiser Futures, said the HKEx scheme would be popular for most of the 180 futures brokers as they did not need to spend money on applying for membership in the LME to trade on the commodity platform.
"Most futures brokers would be happy to trade on the new commodity platform as it would not cost them much money. The key issue for many local futures investors is they focus on index futures trading, which is very different from commodity trading. HKEx would need to do a lot of promotional and educational work for them," Fung said.
HKEx data showed that of the 215,692 futures contracts traded last month, 44 per cent were H-share index futures while 33 per cent were Hang Seng Index futures. There was no volume in gold futures, the only commodity product traded at the exchange.
Fung said that the new commodities products launched by HKEx might attract retail investors due to their small contract size, which would mean that investors could bet a smaller amount of money.