UPDATE 1-LME may allow members to clear contracts in yuan

Tue Apr 17, 2012 8:02am EDT

By Manolo Serapio Jr

SINGAPORE, April 17 (Reuters) - The London Metal Exchange is considering allowing its members to clear contracts in China's yuan currency as part of plans to set up its own clearing house, an exchange official said on Tuesday.

The plan, while far from final, signals the growing significance of China in the global commodities market. China is the biggest consumer and importer of many base metals, accounting for 40 percent of the world's copper demand.

The LME, which handles about 80 percent of global futures trading in industrial metals, is conducting due diligence and asking its members what they would like to see in terms of functionality in the exchange's plan for its own clearing house, said Liz Milan, managing director for LME Asia.

"Clearing in RMB (yuan) is something that we thought we should be looking at. The feedback we have received from members who are very active in Asia and members who have clients in Hong Kong or in China is that they see RMB clearing as an advantage," she said in an emailed response to a Reuters query.

The task of clearing LME contracts is currently being carried out by LCH.Clearnet.

In-house clearing would provide the exchange with cash reserves, which would rise with interest rates, and could create additional revenue from offering the service for non-LME trades.

Milan's comments followed a report in the Financial Times that the LME was asking its members whether they would like to use the yuan in settling and clearing contracts and drop the British pound in the roster of currencies available to them.

"In any case, until the Chinese market fully internationalizes or we get convertibility of currency, it's unlikely that there will be any discussion around trading in RMB," Milan said.

China over the weekend stepped up its bid to internationalise the yuan by widening the currency's trading band against the dollar to 1 percent from 0.5 percent from Monday.

Asked whether the LME was planning to drop the use of sterling in settling and clearing contracts, Milan said: "At this stage, we have no plans to change anything until we've gone through a more formal and detailed consultation."

The LME's benchmark contracts are denominated in U.S. dollars, and Milan said there was no indication, from its consultation with members, that the LME was thinking of changing the currency in which contracts are traded.

The Hong Kong Exchanges and Clearing Ltd (HKEx) has announced plans for several yuan-denominated commodity futures, while the Hong Kong Mercantile Exchange is looking at launching yuan gold and copper contracts.

HKEx is among four potential buyers of the LME that have been short-listed by the 135-year-old bourse, along with CME Group Inc, NYSE Euronext and InterContinental Exchange Inc (ICE).

LME has set a May 7 deadline for second-round bids, sources told Reuters last month.

HKEx is in talks with banks for a loan, which could be worth as much as $3 billion, to help fund its bid for the LME, sources told Reuters last week.

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