HKEX-owned LME plans new metals contracts based on Shanghai Futures Exchange prices: sources

The London Metal Exchange (LME) plans to launch new metals contracts based on prices from the Shanghai Futures Exchange (ShFE), three industry sources familiar with the matter said, further strengthening China's influence over global metals markets.

The collaboration between the 146-year-old LME and ShFE was mentioned briefly and without detail by LME CEO Matthew Chamberlain at the annual LME Week dinner in October.

Two years ago, the idea of ​​China allowing a foreign exchange to use domestic prices would have been met with reluctance, but since then there has been a sea change in the strategic direction of Chinese exchanges, the sources said.

The change comes amid government pressure on Chinese exchanges to innovate and expand their influence across the rest of the world, as well as China's aim to give domestic players more control over commodity prices.

LME CEO Matthew Chamberlain speaks during the LME Asia Metals seminar in Hong Kong in May. Photo: Bloomberg

The process, known as cross-listing, would involve settling new LME metals contracts at ShFE prices, the sources said. The sources did not have a timetable for the launch.

The LME, the world's oldest and largest forum for metals trading, would pay a royalty to the ShFE and the new contracts would be cleared through the LME's clearing house, the sources said.

“During this year’s LME Week, we announced that we intend to further deepen our collaboration with SHFE in 2024 by collaborating on product innovations to better support international participants in risk management and pricing,” the LME responded a request for comment.

Britain's Financial Conduct Authority, which regulates the LME, declined to comment and ShFE did not respond to emailed queries.

It is not known which metals are involved in this initiative, but copper and aluminum are both high-volume contracts on both the ShFE and LME, owned by the Hong Kong Exchanges and Clearing (HKEX).

“Today, if you want to trade a contract on the Shanghai Futures Exchange, it is a long, expensive and complicated process,” an industry source said, adding that other Chinese exchanges were already involved in cross-listing.

Chinese President Xi Jinping inspects the Shanghai Futures Exchange during a city tour on November 28. Photo: Xinhua

China's Dalian Commodity Exchange signed a soybean oil futures settlement price licensing agreement with a Malaysian exchange in early November.

Options for foreign firms wanting to trade contracts listed on Chinese exchanges include setting up offices in China or trading through a broker on the Shanghai Futures Exchange.

“With cross-listing, the LME would have a contract that charges the ShFE price for its members. LME will be able to increase its volumes and revenues,” said a second industry source.

“There are disadvantages. The LME would have no control, Chinese regulators have a lot of control over prices and they intervene frequently… What if ShFE decides to suddenly revoke the license or refuses to renew it?”

However, even if LME members welcome the initiative, new contracts based on ShFE prices require volume and liquidity to gain traction.

Most of the contracts launched by the LME in recent years have not been successful.