The sudden blow-up of the Hong Kong Mercantile Exchange (HKMEx) not only represents the collapse of a commercial proposition. It is also a warning call to Hong Kong’s ambition to develop itself as a commodities trading centre.
After three years in preparation and exactly two years of operation, HKMEx said on May 18 its trading revenues were insufficient to support its operating expenses and it would surrender its authorisation to provide automated trading services to the regulator, the Hong Kong Securities and Futures Commission, with immediate effect. Since all HKMEx’s trading is by ATS, it is effectively shut down.
The SFC confirmed that it had withdrawn HKMEx’s ATS authorisation.
HKMEx offers only two products, a gold futures contract and a silver futures contract, both denominated in US dollars. It began operating on May 18, 2011; until the end of April this year, trading volume for the two products added up to less than 2.4m contracts. HKMEx does not reveal it revenues but, since it charges a fee of 50 US cents a contract (and assuming it charges only sellers), its total revenues for the past two years were probably about $1.2m.
Not much. But things got worse this year: trading volume dropped more than 70 per cent in the first four months, from 455,527 to 135,699 contracts, or an average of about 34,000 contracts a month. (In comparison, the open interest of the CME’s gold futures on May 16 was 444,995 contracts.) Assuming monthly revenues of $17,000, HKMEx was making less than the Hong Kong office rent for an organisation of its size.
HKMEx said it would continue to operate with its existing staff and would focus on developing new products including RMB denominated precious and base metals contracts – as it has been promising to do for the past two years. It said it would re-apply for ATS authorisation “at an appropirate time” in order to launch those products.
Barry Cheung (pictured above), HKMEx’s chairman and biggest shareholder, with 56 per cent, told local media the exchange would raise $1bn through a rights issue; a person close to the exchange told beyondbrics the fundraising would be completed by the end of June.
Since its debut, the HKMEx – in which ICBC Asia, the Hong Kong branch of the Industrial and Commercial Bank of China, Cosco, the state-controlled shipping company, and Russian billionaire Oleg Deripaska each own 10 per cent – has tried to position itself as a bridge between China and the rest of the world. That is an idea Cheung has not given up on. He said in the exchange’s statement:
The favourable conditions under which HKMEx was founded have not changed. Global commodity demand continues to shift towards Asia as the region undergoes sustained growth, presenting great opportunities that we will continue to exploit.
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