Hong Kong Mercantile Exchange wins SFC approval

Gold futures are set to start trading in Hong Kong next month after a two-year delay.
Barry Cheung, HKMEx chairman
Barry Cheung, HKMEx chairman

More than two years after it was first promised, the Hong Kong Mercantile Exchange (HKMEx) is finally set to start trading after winning authorisation from the SFC yesterday. The first gold futures contracts will change hands on May 18, 2011.

The authorisation gives HKMEx approval to set up as an automated trading services provider through 16 broker members. "We are very excited about this historic day," said Barry Cheung, the exchange's chairman, in a prepared statement. "It allows us to establish a liquid and vibrant international commodities exchange based in Hong Kong, linking China with the rest of Asia and the world."

This is important because it will give China, as the world's biggest oil consumer after the US, greater pricing power in the world's commodities markets, according to Cheung, who is an oil industry veteran and was previously deputy chairman of Titan Petrochemical.

"Global demand for core commodities has in recent years been driven by Asia, especially China and India," he said. "However, market participants in the region have had to rely on Western exchanges for price discovery, bearing the basis risk exposure in the process. Our new platform will offer Asia a bigger say in setting global commodity prices. It will also enable market participants to more actively manage their risk exposures, using products tailored to Asian market needs."

HKMEx originally said it would start trading fuel-oil contracts at the start of 2009, followed by agricultural and industrial commodity contracts, but the project has struggled with some of the finer details. Cheung is reported to have said the fuel oil launch was delayed because of complications related to physical delivery in China.

As a result, the first product to trade on the exchange will be a 1kg gold futures contract offered in US dollars with physical delivery in Hong Kong - the exchange has signed a deal with the new gold depository at the city's international airport, where the Hong Kong Monetary Authority also now stores its physical gold reserves.

Trading hours will run from 8am to 11pm Hong Kong time, overlapping commodity markets in Europe and the US. "This helps to promote cross-continent trading and boost liquidity," said Albert Helmig, president of HKMEx. "It also offers participants extensive opportunities for hedging, arbitrage and effective risk management."

HKMEx's broking members at launch include BOCI Securities, Celestial Commodities, CES Capital International, Chief Commodities, ICBC International Futures, KGI Futures, OSK Futures, Phillip Commodities, Tanrich Futures and TG Securities. Interactive Brokers, MF Global and Morgan Stanley will act as both brokers and clearing members.

In the pipeline are standardised products that will either be physically or financially settled, covering precious and base metals, energy, agriculture and commodity indices.

All transactions on HKMEx will be cleared through London-based LCH.Clearnet. The exchange boasts that it has attracted shareholders from around the world, including a 10% stake bought by China's ICBC in 2009, followed by a similar commitment last year from Russia's En+ Group, owned by Oleg Deripaska. Cosco has also invested.

"We are very fortunate to have such a strong shareholder base in addition to a board of directors who are of the highest calibre in their own fields. Our management experience, together with cutting-edge technology, market focused products, and Hong Kong's strategic location and infrastructure will ensure HKMEx a promising future," said Cheung.

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