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Hong Kong Mercantile Exchange president Albert Helmig tells FOi about the benefits of taking a different approach.
Hong Kong Mercantile Exchange went live on May 18, becoming the latest new bourse to open in Asia.
As a gateway exchange between China and the rest of the world, Hong Kong’s newly formed commodity exchange benefits from restrictions which govern Chinese derivatives trading coupled with China’s thirst for commodities.
The initial product launch of a 32-troy ounce gold contract was also timed to the exchanges benefit as western investors are increasingly turning to safe-havens. A US-dollar silver futures contract followed in July, and there are plans to attract further Chinese demand with the launch of a renminbi-denominated gold futures contract.
A further USP of the exchange is the physical settlement of contracts, with the first delivery taking place on August 12.
Trading hours are also longer than for other markets to overlap with Tokyo, London and New York, extending from 8am to 11pm.
HKMEx president Albert Helmig spoke to Nicola Tavendale about these differences in approach and how he hopes to ensure success in an uncertain climate.
FOi: As a new entrant to the market, who are your main competitors and what makes your offering unique?
Albert Helmig (AH): The industry is increasingly shifting to the east, and this has resulted in the consumption of commodities to more than double in this part of the world. Most hedging is done in centres such as London and Chicago, which is not necessarily the best option as they do not always perform in times of stress as good hedges.
In the past couple of days we have seen uncertainty resulting in high volumes, price movement and distribution that do not reflect what is happening in the eastern markets.
The financial crisis of 2008 was really a western debt crisis, the reverse of the saying ‘when the US sneezes the rest of the world catches a cold’.
There are already lots of ways to trade gold and silver contracts, particularly through Asian venues. We stand-out because our offering is different. Our customers are offered real choice with physical delivery in Hong Kong.
We are trying to develop and deliver contracts and instruments that are specifically designed for the region.
Rivals such as India do not offer international participants free access. In Hong Kong, we can combine international standards and participation with the benefits of being a gateway to China.
Our competitors in gold commodities are the cash forward market. However, we believe we are able to offer ‘Chinese choice’. Participants in the Hong Kong commodity market can take delivery of gold without taxation or regulatory barriers.
FOi: You have recently launched new gold and silver futures contracts. When launching a new product, what steps can you take to ensure it is successful?
AH: For a new contract, our USD gold futures are doing very well. Trading is already hitting 3, 4 and 5,000 lots of gold contracts a day with open interest in the 2,500 to 4,000 range.
Even more importantly, we have just completed our first physical delivery which proves to the market that we can make and take delivery in Hong Kong.
It is a continuous building process; we are launching new products and frequently adding new members.
Our next planned roll-out will be gold futures denominated in renminbi. Currently, there are very few ways you can trade gold in RMB internationally. This will be a staged roll-out with a targeted September launch, depending on market conditions.
We are also looking at launching base metals in Q4.
All commodities are different but they all benefit from good contract design. The real challenge for any new contract is the exchange’s readiness to do it. We try to put ourselves in a position to perform well before launching.
FOi: Where do your traders come from and what attracts them to the Hong Kong market?
AH: People trade gold for a variety of reasons. We have a truly global membership, and many of the mainland brokers already have offices in Hong Kong.
Hong Kong is one of the three main gold centres in the world, and has been for over 35 years.
Our attraction is as a gateway to China, which is largest producer and consumer of gold in the world. 70% of gold going into China passes through Hong Kong.
FOi: Do you believe there has been an increase in activity from those seeking out metal commodities as a ‘safe-haven’?
AH: Commodities as an asset class are traded for many different reasons.
We have certainly seen an increase in the commercial, non-hedging side. Not just for gold and silver, most marginal commodities are priced through China. Currently 10% of the world’s oil barrels are bought by China, 30% of copper and 55% of iron ore and steel.
FOi: What was the purpose of offering increased trading hours and how successful has this proved to be?
AH: People want choice, the choice to be able to trade globally and react quickly to global events.
If something happens in Tehran, Damascus, Europe or the US that has an impact, people want to trade the instruments they are in.
The past five days have demonstrated that. Our trading hours cover Asian, European, and US morning markets.
We are a service provider, as all exchanges are. But I think some of them have forgotten this.
FOi: What will be the major market trends over the coming year, and what innovations will you be introducing as a result?
AH: The events of the past week may well become the new normal. We should accept that volatility is not going away. What happens in Greece, London, or the US has a global effect, we are all tied together.
I expect the current environment will not clear-up in the immediate future and will continue at some level for the next three to five years.
We will continue to launch innovatively designed, regional contracts. Another must have is state-of-the-art technology. We have the fastest, newest platform because we realise that technology is an advantage and must be better than the best.
In addition, we also have an excellent relationship with our regulator. Hong Kong is a world class financial centre because regulation is properly handled and best in class for Asia.
Copyright: Futures and Options Intelligence
