The London Metal Exchange (LME) on Monday launched its new clearing house, which plans to add the Chinese currency as collateral by year's end to lure more business from the world's top metals consuming nation. The launch of LME Clear is a key step by LME owner Hong Kong Exchanges and Clearing Ltd (HKEx) to generate profits after paying $2.2 billion to buy the LME in December 2012, a price which many analysts regarded as very high.
The 137-year-old LME set out to build its own clearing house three years ago to take over from LCH.Clearnet, allowing it to collect fees not only for transactions on the exchange, but for clearing them. Over 2 million existing LME positions were transferred over the weekend from LCH.Clearnet to LME Clear. The LME, the world's oldest and largest market for industrial metals such as copper and aluminium, declined to say how much cash the clearing house would bring in. But Jefferies said in a note in July that the new venture would add about $80 million a year in revenue.
Revenue from HKEx's commodities business, which includes the LME, rose to HK$645 million in the first half from HK$608 million a year earlier, HKEx said in August. Expansion in China, which accounts for 40 percent of global copper demand, is another key LME strategy, so LME Clear is moving quickly to allow clients to use the renminbi as collateral, LME Clear Chief Executive Trevor Spanner said. "We definitely know there's latent demand for renminbi," he told Reuters. "As more Asian-based members join the LME and LME Clear, they'll be looking to make use of that renminbi facility. We plan to get that up and running in November, subject to the Bank of England's approval."
LME Clear is also looking into extending its opening hours into Asian hours, he added. The LME's electronic trading platform is open from 1am to 7pm London time while LME Clear operates from 7:30am to 8pm London time. "This morning, we had over 20,000 trades in the queue, which we processed in about 10 minutes," Spanner said. Adding new products is another way HKEx plans to make money, which will be easier by having its own clearing house and being able to plan specifications for both trading and clearing.
The LME has said it plans to launch a new aluminium premium contract in the second quarter of next year and steel rebar and scrap contracts further in the future. LME Clear will also be in a good position to clear over the counter (OTC) products due to the complex structure of LME futures with daily prompt dates. Regulators are keen to shift OTC clearing to established venues to promote transparency.
"There's a lot of activity which is not on exchange at the moment. People are interested in clearing solutions for OTC business," Spanner said. The new clearing house also plans to expand types of collateral to include warehouse warrants, ownership documents for metals stored in LME warehouses. Currently, cash and bonds are the only collateral allowed, but since LME contracts are physically settled, LME members requested the addition.
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