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HKEX rolls out 'mini' futures designed to help investors hedge six base metals during Asian trade

Enoch Yiuenoch.yiu@scmp.com

The operator of the Hong Kong stock exchange will launch US dollar-denominated "mini" futures for six base metals on Monday, reflecting the second batch of products launched within a month, as the exchange presses ahead with its strategy to become a leading Asian asset management centre within three years.

The contracts will track aluminium, zinc, copper, nickel, tin, and lead under a mini structure comprised of 5 tonnes of metals per contract compared with 25 tonnes traded on London Metal Exchange (LME), according to Hong Kong Exchanges and Clearing. The contracts will use reference pricing from the LME, a wholly-owned subsidiary of the HKEX, while settlement will take place in Hong Kong.

The products, known as London Metal Mini Futures, will enable trade in the Asian time zone for investors that have exposure in US dollar denominated base metals, and it will also compliment existing yuan-denominated metals contracts, HKEX said in statement.

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Analysts said they were optimistic the dollar-based mini contracts would be better received by the market than the six metal contracts traded in yuan, launched by the HKEX in 2014. These have failed to take off in Hong Kong, with only one LME mini contract changing hands per day on average in the first half of this year, ranking as some of the thinnest traded products on the Hong Kong stock market.

Officials from the HKEX and the London Metal Exchange (LME) have expressed interest in establishing a commodities connect between Hong Kong and London. Photo: AFP alt=Officials from the HKEX and the London Metal Exchange (LME) have expressed interest in establishing a commodities connect between Hong Kong and London. Photo: AFP

"The six US dollar LME mini contracts are expected to be more popular than the existing yuan metal contracts," said Jerry Jrearz, international business director of Hong Kong-based brokerage First Asia Merchants Bullion. "The yuan is not yet fully convertible and international investors are used to trading metal contracts in US dollars. The new products will be easier for international traders to use the Hong Kong market for hedging."

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Charles Li Xiaojia, chief executive of HKEX, has laid out a three-year strategic programme to transform the exchange and bolster connections overseas. Photo: Jonathan Wong alt=Charles Li Xiaojia, chief executive of HKEX, has laid out a three-year strategic programme to transform the exchange and bolster connections overseas. Photo: Jonathan Wong

Jrearz, who has been a metal broker for 40 years, said Hong Kong has the potential to be a commodities trading hub provided the exchange continues to promote itself.

"Dubai has successfully attracted many Indian investors to trade gold products in recent years and Hong Kong can do the same," Jrearz said. "The London Metal Exchange is a big name with over 100 years of operational history while its products are attractive. The only problem is a lack of promotion," Jrearz said.

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The LME, the world's largest financial marketplace for base metals, was bought by the HKEX in 2012 for £1.39 billion (US$2.2 billion), as part of the exchange's strategy to diversify into commodities trading.

Matthew Chamberlain, chief executive of the LME, said in May that the US dollar mini contracts will help form a London-Hong Kong commodities connect.

"Traders have shown a great deal of interest to trade LME products in the Asian time zone," Chamberlain said during a visit to Hong Kong.

The US-dollar metal futures are set to begin trade on Monday, even as some parts of the city may be affected by strikes in support of protesters seeking the full withdrawal of an extradition bill which has been declared "dead" by senior city leaders.

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"Monday is a normal trading day at HKEX. As the market operator in Hong Kong, keeping our markets operating and functioning is always our top priority," a spokeswoman of the HKEX said.

Other market experts questioned whether launching new financial products during the escalating political crisis in Hong Kong would backfire.

"The protests in the past two months have dampened investment sentiment," said Tom Chan Pak-lam, chairman of the Institute of Securities Dealers.

"It will be difficult to promote new investment products when Hong Kong is facing unprecedented social unrest and violence."

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2019 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2019. South China Morning Post Publishers Ltd. All rights reserved.