The London Metal Exchange (LME) reportedly intends to introduce new metal contracts utilising prices from the Shanghai Futures Exchange (SHFE), according to three sources within the industry, as reported by Reuters. This move is anticipated to amplify China's impact on global metals markets.
Matthew Chamberlain, the London Metal Exchange Chief Executive (LME), briefly touched upon collaboration with the Shanghai Futures Exchange (SHFE) during the annual LME Week dinner in October 2023. However, no specific details were provided at that time.
Cross Listing
Two years ago, the concept of China permitting an overseas exchange to adopt domestic prices would have been met with hesitation. However, according to sources, there has been a significant shift in strategic direction at Chinese exchanges since then.
This transformation is attributed to the government's pressure on Chinese exchanges to embrace innovation and extend their influence globally. It aligns with China's objective of empowering domestic players to exert more control over commodity prices.
The process, known as cross-listing, would involve introducing new LME metal contracts that settle against SHFE prices, according to insider information. Although there is no specified timeline for the launch, sources reveal that the LME, recognised as the world's oldest and largest metals trading platform, plans to pay a license fee to SHFE. The proposed contracts would undergo clearing at the LME's clearing house.
In response to a request for comment, the LME stated, "During LME Week this year, we announced that we intend to further deepen our collaboration with SHFE in 2024 by working together in product innovation better to serve international participants in risk management and price discovery."
The Financial Conduct Authority in Britain, responsible for regulating the London Metal Exchange (LME), has not provided comments on the matter. Additionally, requests for comments via email to the Shanghai Futures Exchange (ShFE) still need to be answered.
The specific metals involved in this initiative are not disclosed at this time. However, it's worth noting that aluminium and copper are significant high-volume contracts traded on both the SHFE and the LME, both owned by Hong Kong Exchanges and Clearing.
ShFE contract process
Obtaining a contract on the Shanghai Futures Exchange today involves a lengthy, expensive, and intricate procedure, remarked an industry insider. They noted that several other Chinese exchanges had already initiated cross-listing.
Foreign companies seeking to trade contracts listed on Chinese exchanges can choose between establishing operations within China or trading through a broker on the Shanghai Futures Exchange.
Insider story
"By engaging in cross-listing, the LME would establish a contract that resolves against the SHFE price for its members, facilitating potential growth in volumes and income," noted a second industry insider.
"However, there are drawbacks to consider. The LME would relinquish control, as Chinese regulators exert significant oversight over prices and frequently intervene. The potential risk arises if the SHFE abruptly revokes the license or refuses to renew it."
Despite the positive reception of the initiative by LME members, the success of new contracts relying on SHFE prices hinges on the development of substantial volume and liquidity.
Responses
