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Hong Kong futures exchange closes, plans cash settlements

Section: Daily Dispatches

Hong Kong Mercantile Exchange Closes

By Nick Edwards
South China Morning Post, Hong Kong
Sunday, May 19, 2013

The Hong Kong Mercantile Exchange will go ahead with a planned US$100 million rights issue and be ready within months to reapply for the trading licence it handed back to regulators at the weekend after it became clear the struggling commodity trader could no longer meet crucial financial criteria.

HKMEx chairman Barry Cheung Chun-yuen told the Sunday Morning Post that the decision to surrender the trading licence and not reopen for business tomorrow would have no impact on investors and that client contracts would be honoured.

"There is no question of not getting your money back or anything like that," Cheung said. "People absolutely do not have to worry about that and I don't think they are. The only thing they will want to know is what settlement price will be used."

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HKMEx was working with LCH.Clearnet -- the world's largest clearing house for financial transaction settlements -- to arrange settlement pricing on the exchange's roughly 200 outstanding contracts, Cheung said.

The tiny number of outstanding contracts reflects the difficulty HKMEx has had in attracting trades to the platform that officially opened almost two years ago to the day on May 18, 2011.

In contrast, the London Metal Exchange, owned by Hong Kong Exchanges and Clearing, saw record volume in April of 14.5 million lots traded. The Chicago Mercantile Exchange, the world's biggest commodity trading platform, traded 11.6 million contracts daily in April.

The decision to hand back the trading licence was taken by HKMEx when it became clear that it was no longer able to meet the Hong Kong Securities and Futures Commission requirement that the exchange had sufficient cash to cover nine months of operations.

Cheung said the rights issue would solve that problem.

"We are in the process of doing a rights issue which we expect to be completed by the end of June.

"This exercise will raise US$100 million. It will be sufficient to meet the SFC's requirements as well as to support the exchange's operations for the next three to four years," Cheung said.

The next few months would be spent redefining strategy, finalising the rights issue, and closing negotiations with potential strategic shareholders in a bid to reapply for the licence.

"This could be in two, three, or four months' time and we hope to use this period to regroup, to improve, refine our shareholding structure, to bring in some new additional strategic shareholders, to continue to prepare new products … and to make various improvements," Cheung said.

He declined to identify the potential new shareholders, saying only that they were likely to be based on the Chinese mainland, though Cheung also did not rule out the possibility of other international entities being part of the new HKMEx structure.Cheung conceded that a delay in rolling out the exchange's planned yuan product range over the last 12 months had not been helpful.

Cheung, who chaired the 2012 election campaign for Hong Kong Chief Executive Leung Chun-ying, and who is a non-official member of the Executive Council of Hong Kong, said there was no political issue involved in the decision to close the doors of the HKMEx for trading.

"This is a private commercial matter that has nothing to do with my public duties. I try to do my best in both areas.

"Of course this has nothing to do with the government or the chief executive," he said.

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