Hong Kong Exchanges & Clearing (HKEx) aims to launch a suite of commodity derivatives contracts on its newly acquired London Metal Exchange (LME), to potentially lure trading from bourses in China.

It forms part of the exchange’s plan to become “the derivatives capital of the world in the Asia time zone”, said HKEx chief executive Charles Li yesterday at the FOW Derivatives World Asia conference in Hong Kong.

His comments stand as the clearest indication yet of how HKEx plans to leverage its acquisition of the LME – which it bought in 2012 for $2.2 billion – to lure trading from commodity exchanges in China.

Li says the exchange plans to list mini-LME contracts on its equity derivatives platform, likely this year. These will be cash-settled initially.

The hope is that it can match some of the contracts traded on the Shanghai, Dalian and Zhengzhou commodity bourses with the settlement price licensed from them – referencing onshore prices – and trading these contracts in Hong Kong.

The aim is to have two versions for most commodity derivative products trading side-by-side – one referencing China, and the other international benchmarks of the LME, says Li.

Over time, HKEx will propose that onshore China commodity traders consider moving some trading activities to Hong Kong, although Li concedes these plans will depend on mainland regulatory approval.

By establishing a licensing agreement with Chinese exchanges, the settlement prices would reference the onshore prices. Li says the Hong Kong-traded contracts would be denominated in offshore renminbi.

By licensing the reference price from another exchange to settle derivatives contracts, traders will be able to use a contract listed on one exchange to hedge the exposure of the other contract.   

“Through such a trading channel we want to bring renminbi liquidity into Hong Kong and also back to mainland China,” says Li. “That would bring incremental renminbi flow down to Hong Kong to expand [Hong Kong’s RMB pool beyond deposits]. This would have huge implications for both onshore and offshore renminbi interest rates.”

Cheng Haibo, deputy director in the information and statistics department for futures supervision at the China Securities Regulatory Commission, told AsianInvestor on the sidelines of the conference that the CSRC had been exploring third-party licensing with HKEx for over a year. He said there has been no resolution on such collaboration.

Commodity contracts trading on Chinese exchanges have seen fast growth in recent years. The Shanghai Futures Exchange had the top three metals futures and options contracts by volume globally last year with its steel rebar, silver and copper futures, according to the Futures Industry Association annual survey. LME’s high-grade primary aluminium futures contract was the fourth most traded.

In terms of agricultural futures and options, the top three contracts by volume last year were soybean meal futures on the Dalian Commodity Exchange (DCE), rapeseed meal futures on Zhengzhou Commodity Exchange and soybean oil futures on DCE. Chinese bourses had six of the top 10 biggest contracts.