HONG KONG, June 24 (Reuters) - The most lucrative first step for Hong Kong Exchanges & Clearing Ltd (HKEx) to profit from its expensively acquired metals business would be a new type of membership that could attract Chinese clients, a brokerage executive said.
HKEx paid $2.2 billion for the London Metal Exchange (LME) last year and is under pressure to show a return on its investment, partly by attracting Chinese banks as members. But it has so far drawn only one mainland financial institution.
Jeremy Goldwyn, a director of London-based Sucden Financial, said that HKEx is considering a new “Category 8” membership that would allow Asia-based clients to sidestep costly requirements of having a physical presence in London to trade on the world’s biggest metals marketplace.
Such a move could help to attract clientele from China’s huge commodity trading market, said Goldwyn, whose firm is a “Category 1”, or ring-dealing, member of the LME.
The LME said that it “regularly reviews new market access models” but had no immediate comment on specific options.
“If they bring in new membership it will increase activity and boost volumes quickly - an easier and quicker method (of luring Asian business) than launching new contracts,” said Goldwyn, who is responsible for Asian business development at Sucden.
Alongside Asia-based banks and brokers, allowing “black box” and other systematic traders access to a new membership category, as has been mooted, would attract new clients and boost overall trading volumes on the LME, he said.
“All those banks in Singapore ... that currently have to pay clearing brokers, potentially wouldn’t have to,” he said, adding: “I still think it will effectively increase the cake, in that some of those customers will look to do business with other (LME) members.”
Still, the biggest driver of business to the exchange is likely to come from subtle shifts in China’s policies on markets such as foreign exchange, and from new regulations in the United States and Europe, he said.
Monthly settled contracts, which HKEx has also mooted, could help it to claw back or at least stem some of the business it is losing to CME Group, Goldwyn said.
CME runs the monthly cash-settled Comex copper contract, the world’s second-biggest after the LME.
The COMEX contract’s share of the market last year increased to 13 percent from 11.7 percent in 2011. Its monthly volumes rose by 30 percent to an average of 15.3 million tonnes, from 11.8 million in 2011.
But the LME still dominates the global market. Its average monthly futures trading volumes measured in tonnages rose by 4 percent to 74 million tonnes in 2012, from 72 million in 2011.
Despite growing competition from other exchanges, Chinese clients with an appetite for trading price differentials across products and markets would also have appetite for an iron ore futures contract because it would open up another market to trade, Goldwyn said..
“A lot of the appetite for the business out of China for commodities is on an arbitrage basis, for which you need liquidity and ... frequency of trading,” he said.
“A liquid iron ore futures market has great potential. Coal is a little more complex, but it’s similar.”