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“The monthly dates could be the entry point while still maintaining a date structure,” Goldwyn said.
“If the LME did away with the three-month rolling date contract, and had third-Wednesday monthly contracts, clients could still have a hedge related forward ‘three-month’ position but could then adjust it back to whichever date and the three month liquidity would spread from a single date to maybe two or three ‘monthly’ dates – so only a marginal reduction.”
There are many who rely on short-carry trades and tom/next activity, so if fees are kept low for those it would appease the traditional users of the LME, according to Goldwyn.
The monthly date structures might be useful for those using cash settled contracts on other exchanges, such as the CME and over-the-counter (OTC) markets.
He also pointed out that there is no alternative market for the vast majority of international base metals trading and hedging apart from Comex copper and “let’s not forget that is just one product, so apart from the threat of OTC and other arenas, the LME remains dominant globally”.
The LME’s discussion paper by newly appointed ceo Matthew Chamberlain is a “sound one,” Goldwyn said, adding “the consultation after the discussion paper needs to be done as a partly cathartic process.”
“The LME has the unique characteristic of a market where the brokers offer credit to clients,” Goldwyn said.
“If the LME moved to a cash-cleared market, some people will be happy as they don’t need credit from brokers and financial institutions while some clients and brokers are terrified by the idea,” he explained.
“But that doesn’t mean the debate shouldn’t take place – it reduces overall systemic risk and reduces the need for all the mechanics and concerns over porting, in the event of a crisis.”
“Plenty of Chinese clients love the concept of credit facilities and this topic could become a bigger debate than the date structure over the next week and months,” Goldwyn added.
Credit is always a pressure point in the market, he said, but brokers that offer significant credit are becoming rarer and are finding it harder to justify in terms of returns.
“At Bands, our clients do include corporates although we have a particular focus on the financial community including Chinese hedge funds who are less credit driven compared with [state-owned] producers that are still looking for significant credit.”
“There are certain challenges of doing business with Chinese clients” he said, adding “there is very little exclusivity of clients, as most clients have lots of brokers. Hence clients don’t have to go rushing around to replace a broker if one exits the market. So developing business there takes time and effort.”
“Personally, I look forward to reacquainting myself with many of the close client relationships I established and built during my long tenor at Sucden during which time we developed a large and successful presence in the Chinese market,” Goldwyn, who joined Bands last month, said.
“Working with and exchanging views with these smart and entrepreneurial people was always one of the more rewarding aspects of my Chinese experience along with developing a voice in the marketplace, It’s good to be back.”
Bands Financial was set up by two former LME brokers John Browning and Tiger Shi in late 2015. It offers a full range of futures for its clients including equity index, energy, grains, softs, currencies, precious metals and base metals.
Bands connecting east and west Hong Kong-based broker Bands Financial, with its two associated companies Bands Risk Management, also in Hong Kong, and a wholly foreign-owned enterprise in Shanghai, has the structure in place to successfully connect the east and west in many ways, according to Goldwyn.
“There is opportunity to expand our brokerage and execution business with the ever-increasing outbound business from China,” he said. “We want to operate as piece of the East-West bridge and our personal experience and location in Hong Kong helps us drive that connect between China and the rest of the world.”
Apart from the traditional brokerage business, Bands can play the part of a “niche financial institution” and get involved in structural deals and collaboratively work with wealth management companies and Chinese institutions longer term to create China-focused investment products both in China and outside China, Goldwyn said.
“The growth in our clients has been steady since John and Tiger set up Bands. We are profitable and generating a good return,” he added.
China will have 720 million aspiring middle class citizens by 2020, according to Bands Financial website. In the last three years over 20,000 hedge funds have been registered on the mainland. China’s investor population is growing in wealth and sophistication but a mature pension fund industry does not yet exist.
Investor money is flowing out from China looking for return and diversification while, international fund managers are seeking Chinese expertise and want access to diversification opportunities, according to Goldwyn.
In terms of opportunity, the Chinese derivatives environment is changing and evolving rapidly, he added. “There is much more talk of the internationalization of futures and derivatives markets potentially beginning this year with iron ore and/or oil, plus the recent launches of the first domestic commodity options products have raised interest in this area too.”
The Chinese investment companies who are trading arbitrage products are continuing to grow in both number and depth, he said, and they are trading a wider range of products, not limited to just metals products.
“The key benefits we have at Bands are that we have a flexible corporate environment, extensive and focused experience and limited legacy business. All this enables us to focus clearly on continued good Chinese long term market conditions with an appetite for commodities but a wider offering of equities, financials and indices within a less stringent and complex regulatory environment than most of our global competitors.”
“We have a simple management structure and a lean staff that allows us to be nimble and get involved in new and varied areas of business quickly and efficiently. Whether that be to focus on the current outbound business from China, including working with Chinese enterprises to expand their own global footprints, or to prepare ourselves and our western clientele for a likely dual function of introducing them into the Chinese arenas and products in coming months and years. It’s an exciting prospect,” Goldwyn said.