New | LME working on linking with commodity exchanges in China, but process not simple

The London Metal Exchange (LME) is in detailed talks with mainland authorities to create direct trading links with domestic commodity exchanges that would emulate the Shanghai-Hong Kong Stock Connect.

“We have not yet come to the stage for any concrete details, but we are in a very good place in exploring what type of connection can be done,” LME chief executive Garry Jones told the South China Morning Post in an interview on the sidelines of the annual LME Week Asia in Hong Kong.

Jones said the complex nature of commodities trading relative to equities meant multiple options were on the table in discussions that could link commodity markets in Dalian and Shanghai to Hong Kong.

“Commodities work differently. Each type of contract has their own contract size and trading rules. Investors can also choose to settle in cash or physical delivery. As such, a tie up between commodity markets would be in more different formats,” he said.

Besides creating a mechanism for mutual market access for cross-border trading, common licensing and listing rules would also have to be established and the various exchanges would have to agree a framework of clearing and warehousing rules to unify settlement and delivery processes.

Charles Li Xiaojia, the chief executive of Hong Kong Exchanges and Clearing which owns the LME, said on Wednesday they would work with mainland exchange and warehouse operators for a potential link within three to five years to allow physical delivery for commodity or LME products.

It took only seven months to kick off the Stock Connect scheme in November, though officials had done much preparatory work on how it was likely to work after the project was first mooted some years previously.