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HKEx's first commodities trading platform will offer local investors three yuan-denominated metal contracts. Photo: Edward Wong

Thin turnover expected in debut for HKEx metal contracts

Zinc, copper and aluminium futures denominated in yuan to make their trading debut today, setting a milestone for the Hong Kong exchange

HKEX

The Hong Kong Exchanges and Clearing will today launch a milestone commodities trading platform by introducing Hong Kong investors to three yuan-denominated metal contracts.

This will mark another step for the exchange in expanding its yuan footprint as Hong Kong strives to cement its position as the world's foremost offshore yuan hub.

Two weeks ago, the exchange was linked to its Shanghai counterpart in the landmark stock through train scheme allowing cross-border trading.

Brokers' reaction to the metal contracts has, however, been tepid. Of the 179 brokers, only 72 have prepared their systems to trade the products.

"I have my system ready and have promoted the products to customers. But customers so far have shown little interest," said Gary Cheung Wai-kwok, the chief executive of Tung Shing Futures (Brokers). "That is not a surprise as many of them only like to trade Hang Seng Index futures and have little interest in other futures products."

The three contracts - zinc, copper and aluminium - will be traded electronically, with each contract size set at 5 tonnes, representing a fifth of normal contract size traded on the London Metal Exchange, the world's largest metal exchange that HKEx took over in a HK$16.96 billion deal in December 2012.

The exchange has accordingly named the three new contacts "mini" LME contracts but there are many differences. The London ones are traded in US dollars and can be settled physically or in cash. The Hong Kong contracts are traded in yuan and can only be settled in cash.

Credit Suisse analyst Arjan van Veen said it would take time to build volumes in new contracts.

"Given that LME represents around 20 per cent of total HKEx revenues, [the new metal contracts] are not likely be material for some time," van Veen said.

Joseph Tong Tang, an executive director of Sun Hung Kai Financial, said: "We have many institutional clients in Hong Kong who are trading metal contracts on the London Metal Exchange. I think they'll not shift much of their trading to Hong Kong immediately. It needs time for a local market to build up volumes and it would not be easy to compete with the internationally established commodities exchange."

According to Tong, international metal investors would be interested in trading in Hong Kong only if there is some breaking news after the London market close and they need to use the Hong Kong market.

"The HKEx would also need to make an effort to create liquidity. The more the liquidity of the market, the more the traders will want to trade here," Tong said.

The HKEx has appointed three brokers to act as liquidity providers to quote prices throughout the market hours.

The exchange has also offered fee rebates to 14 firms that signed up as active traders, setting them trading targets to qualify for the rebate.

KGI Asia director Ben Kwong Man-bun said the futures arm of the brokerage had informed its metal trading clients about the new products on the HKEx.

"We believe the trading won't be very active in the beginning because commodities are new to many Hong Kong investors. Investors trading on the LME would want to see how the local market fares before joining in," Kwong said.

Kwong, however, said the metal contracts platform was a significant move for both the HKEx and Hong Kong in the longer term.

"China is the world's largest metal consumer and it has many companies that would need to do hedging. China may relax more rules to allow these companies to freely trade in Hong Kong in the future," he said.

"It may also establish another market connect scheme to allow investors to conduct cross-border commodities trading in the future. This is why HKEx needs to introduce metal contracts now to prepare itself for such opportunities in the future."

Metal end users have shown interest in the new platform. Hong Kong-listed metal trader Lee Kee Holdings chief executive Clara Chan Yuen-shan said the firm had many mainland metal buyers who seemed keen.

"They are now using the LME for hedging," Chan said. "After the HKEx introduces the metal contracts, it should be able to attract mainland investors because it is trading in their time zone and uses the yuan."

Hong Kong Futures Exchange, now part of the HKEx, traded agricultural products in the 1980s but the trading was suspended as the volumes thinned out in the 1990s. The HKEx now only has one commodity product - gold futures - but it has seen no trade this year.

This article appeared in the South China Morning Post print edition as: Thin turnover seen for metal contracts
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