Hong Kong Aims to Extend Shanghai Link

Terry Flanagan

Charles Li, chief executive of Hong Kong Exchanges and Clearing Limited, would eventually like to duplicate the planned link between Shanghai and Hong Kong in equities into the commodities market.

Last month, the exchanges and their respective clearers in Hong Kong and Shanghai signed a four-way agreement to establishment of Shanghai-Hong Kong Stock Connect. The connection allows investors with access in one market to buy and sell eligible shares listed on the other.

Li said at the LME Metals Seminar in London on October 20 that the link was ready but a launch date has not been finalised.

On September 13 the two exchanges completed the market rehearsal programme for Stock Connect by verifying that back up procedures were adequate in the event of a system failure. HKEx said in a statement that 97 exchange participants, who make up 80% of the total securities market turnover, and 108 clearing and settlement participants took part in the market rehearsals.

Li said at the LME conference: “If Stock Connect works and is successful there is no reason to believe the arrangement could not be replicated in commodities trading. This would be a major transformation of the market.”

He explained that Stock Connect links the two exchanges and their clearing houses so participants can trade equities in the opposite market in the same way as domestic stocks. For example, a Hong Kong-based client can buy a stock listed in Shanghai but clearing and settlement remains in Hong Kong and vice versa.

In order to link commodities trading between the two markets the equities-based Hong Kong exchange needs to build a suite of products for a new asset class. This was part of the reason behind HKEx buying the London Metals Exchange in 2012.

Garry Jones, chief executive of the LME, said at the conference that the Hong Kong group had invested significant amounts in LME since the acquisition, including £107m in launching a new clearing house. Last month the metals exchange launched LME Clear and transferred all the positions of LME members from the previous clearer, LCH.Clearnet, to its own risk and clearing system.

Jones said the LME’s growth strategy was to build a local presence in Asia.

“We can reduce the time to launch new products and position ourselves for significant growth into Asia,” Jones added. “The sales teams in Singapore, Shanghai and Hong Kong are now the equivalent of the sales team in London.”

Rebecca Brosnan, head of the Asia commodities at HKEx, said at the conference that since the LME acquisition her team had grown from two to 20 people who are subject matter experts but also speak the local languages.

Before the end of this year HKEx plans to launch four mini-metals futures contracts in Hong Kong in aluminium, zinc, copper and coal which are much smaller than the contracts that trade on the LME. The mini futures will be traded in renminbi and in Hong Kong hours.

Brosnan said: “This will open up the LME benchmark indexes to a whole new set of traders who are focussed on cash-settled products.”

Featured image via Flickr/Filip Maljković under creative commons

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