COMMENT: It’s all going on in Hong Kong

2013 is shaping up to continue last year’s story of exchange consolidation, price discovery in Asia and growing ties between east and west, if recent weeks are anything to go by.

2013 is shaping up to continue last year’s story of exchange consolidation, price discovery in Asia and growing ties between east and west, if recent weeks are anything to go by.

Last week, possible developments emerged that each could be as significant in their own as the Shanghai Futures Exchange (SHFE) plans for an oil contract – the dual-currency specification of which could be a template for copper, and access to which could provide a model for western metal brokers.

Just as the details coming out of SHFE grabbed the headlines earlier, the focus was right back on Hong Kong Exchanges & Clearing (HKEx) last week.

First, Metal Bulletin reported that HKEx had been informally approached by users about buying NYSE Liffe’s soft commodities market from the IntercontinentalExchange (ICE), which is due to complete its purchase of NYSE Liffe later this year.

Second, brokers, including Jefferies Bache’s global head of base metals & listed products, LME veteran Mike Frawley, said they believe HKEx is considering the possibility of launching contracts benchmarked against LME prices, but traded and cleared in Hong Kong.

HKEx answered questions about both developments by saying it had no specific plans, and adding that informal engagement with the market about opportunities was a normal part of business.

Still, both suggestions sent pulses racing.

The first proposition speaks both to the continuing process of exchange consolidation, and as Andrea Hotter points out, could provide an insight into the degree to which Charles Li and HKEx want to be in commodities other than metal.

The logic for ICE ceo Jeffrey Sprecher’s acquisition of NYSE Liffe is thought to be based more on financial futures than commodities that complement the suite he already holds at Nybot, though equally he will perhaps wonder what giving up one square in the game now – willingly or at the behest of regulators – will mean two moves hence.

The second possibility is, if anything, harder to gauge.

The report that HKEx was considering launching and clearing LME-benchmarked prices, however informally, was greeted positively at one end of the spectrum and as outlandish at the other.

There are no specifics as yet, but some have a sense that there is a market to be tapped in Asia, which for the moment the LME contracts themselves have not captured.

They argue that giving brokers and clients the choice of trading or clearing in London or Hong Kong could be beneficial, and point out that LME-linked contracts would not necessarily need to be traded exclusively in dollars or with the current date structure, thus creating potential arbitrages with the LME’s own contracts.

Others see the suggestion as ridiculous, arguing that LME-linked contracts on the HKEx would diminish the contracts and exchange that HKEx spent £1.4 billion ($2.2 billion) to buy last year.

Still, change and fresh-thinking are a natural consequence of such a deal, so radical proposals should not be discounted immediately.

Keep it tuned because things are changing – and more rapidly than Metal Bulletin thought they were last week…

Alex Harrison
Twitter: @alexharrison_mb

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