‘Hedging interest has improved in Asia’

Easing currency flow has opened up hedging opportunities in the continent

The London Metal Exchange (LME) provides hedging opportunities to metal players across the supply chain worldwide. However, now, William Fyfe, Head of Singapore, London Metal Exchange, says that to attract more participants, the LME plans to introduce mini-contracts in association with the Hong Kong Exchange. Fyfe also talked to BusinessLine about complex regulations in Asia, improved liquidity for steel contracts (introduced in 2015) and its plans for India.

Excerpts:

Which part of the world contributes the most to your business?

We get business from across the globe — Singapore, Australia, Japan and Korea...; it is a good mix of industrial business — speculative and proprietary. And, of course, there is business from China; most of it comes from Hong Kong and Singapore. Asia is much more complex than other regions, because of the number of regulators and currency control issues. Europe, the US and Canada all have free movement of capital and are relatively simple markets to understand; market access is also very easy. Asia is much more complex, but it has more hedging interest and opportunities now.

How’s the business from India and are you considering a warehouse in the country?

India is a very important market for us and we’ve been involved with it for a long time. We’ve got a lot of Indian brands already listed on the LME, and large Indian corporates have access to hedge on the exchange.

One of the requisites to start an LME warehouse network in a country is for it to be a net consumer of metals. Also, there should be certain logistic facilities such as a major port or railway and a true bonded warehouse legal structure. So, I think, with India moving towards becoming a net consumer of metal, there’s no reason why, in the future, we can’t explore having warehouses in the country, either in conjunction with local partners or in some other way.

How is the trade of steel scrap and rebar contracts panning out?

Scrap and rebar were introduced in November 2015. It’s taken a while to gain traction, mostly because steel is a relatively new market, and the industry traditionally hasn’t really hedged in the same way as the non-ferrous metal industry. Awareness and connecting customers to brokers have helped us improve liquidity.

When you launch contracts, end-user customers, brokers and tech vendors need time to get approvals internally, to be able to add or trade those products. The ability to launch and have liquidity from day one is challenging nowadays for any exchange.

Does LME have plans to reduce the contract size?

The big physical traders, and investors who developed the market are happy with the current size of the contracts.

Plans of smaller contracts have led to LME mini-contracts, in association with the Hong Kong Exchange, which will hopefully be launched in the latter part of the year. The Hong Kong Exchange brokerage community is more retail-focussed and has a good distribution platform and is, thus, the best to launch these smaller sized monthly contracts.

Do you have plans to increase the physical deliverable contracts (which is now just over 1 per cent of total contracts) that help in accurate price discovery?

About 1-2 per cent is usually common across most exchanges running a physical delivery business. LME physical delivery processes are tapped as the market of the last resort and the LME is not primarily a physical trading platform. But physical delivery contracts prices are perceived as trustworthy because of the physical underpinning. That said, for many markets, cash-settled contracts are a practical option, and most of our contracts are cash-settled.

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