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Potential HK Exchange, LME tie-up makes sense

26-Apr-2012 Intellasia | Reuters | 7:05 AM

A tie up between the London Metal Exchange and Hong Kong Exchanges and Clearing Ltd (HKEx) (0388.HK) makes sense to maximise opportunities in commodity-consuming giant Asia, an official of China’s top investment bank said.

Any buyers for the world’s leading market place for metals like copper and aluminium, which opened its doors to a potential take-over last year, are expected to submit binding bids by May 7.

Sources close to the bidding process for the 135-year old bourse told Reuters last month that CME Group (CME.O), NYSE Euronext (NYX.N), InterContinental Exchange (ICE) (ICE.N) and HKEx are on a shortlist of potential suitors.

“If I had the ability or option to do so, I would have long ago launched some dual listings of LME contracts in Hong Kong. That would help to bring a lot more flows onto this platform,” said Janet Kong, China International Capital Corporation Limited (CICC) head of commodities research told Reuters.

She pointed to the runaway success of Shanghai’s copper future contract as evidence of Asia’s increasingly muscular role in driving demand.

“Hong Kong wants to do more in the physical aspect of intermediation,” Kong said in an interview in London.

“It’s very natural for them to think a little bit forward, to bring more contracts that are China related onto the exchange. So tieing up with the LME makes a lot of sense… that would be a very good marriage from my view,” she added.


Earlier this month, sources said that HKEx was in talks with banks for a loan to help it finance an offer for the LME, a sign that the world’s most valuable bourse is aggressively pushing ahead with a bid.

HKEx sat on the sidelines through a wave of exchange consolidation in major financial centres more than a year ago, though most of the mooted deals then, from London and New York to Sydney and Toronto, eventually fell through.

It has since then made clear ambitions to ramp up in commodities, setting aside $258 million (159 million pounds) to expand into commodities and fixed income.

Bidders have to win over many shareholders in the member-owned LME, smarting over its decision to introduce a new user fee in the run-up to the sale.

The LME has been operating on a constrained profit model, keeping its fees low for the shareholders who use the exchange.

But some shareholders who had fiercely resisted the possibility of a sale suggested they had tempered their opposition to a deal analysts have estimated to be worth around 1 billion pounds.

With an eye on China, the LME is considering allowing its members to clear contracts in China’s yuan currency as part of plans to set up its own clearing house, a move that Kong said would be adventageous.

“London now is chosen as the first overseas financial centre that can settle offshore renimbi, so that would make the tieing up even easier…that would help to eliminate some of the currency problems for the traders,” she said.

A unit of Bank of China (601988.SS) <3988.

It will be the first bank from China to become a member and would add to the exchange’s credentials.

Kong said that CICC had also considered making an application, but had decided to hold back for the short-term.

“Probably it is a proposition for us sometime down the road… probably a three to five year horizon.”


Category: Hong Kong

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