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HKEx adds dollar-denominated small metal contracts: flexible operation, low transaction fees and integration with domestic and foreign markets
Jul 29,2019 16:19CST
HKEx announced that it would launch dollar-denominated London metal futures contracts in US dollars on August 5, 2019, including copper, aluminum, lead, zinc, tin and nickel. The new small contract trading mechanism will be more flexible and will enhance the interconnectedness and liquidity of the global basic metals futures market. In addition, it will bring a series of benefits to investors.
The content below was translated by Tencent automatically for reference.

The Hong Kong exchanges and Clearing Limited (HKEx) has announced that it will launch a US dollar-denominated London metal futures contract on August 5, 2019, including copper, aluminum, lead, zinc, tin and nickel. At the same time, the existing RMB contract will be renamed the "RMB (Hong Kong) London Metal Futures contract" after the launch of the US dollar contract.

"for more details, please refer to the official website of the HKEx

The small contract is a monthly futures contract for a continuous period of 12 months with a trading unit of 5 tons per hand. The trading hours are from 9 am to 04:30 (daytime trading hours) and from 05:15 to 3 am the following day (post-market futures trading hours). It straddles the mainstream trading time in the domestic and foreign futures markets and can link up with the foreign trading time. The setting of a 45-minute break mainly takes into account: 1. Exchanges and futures companies settle the T period; 2. HKEx T 1 does not have pre-market bidding, using these 45 minutes to sort out the sequence of 05:15 quotations.

The launch of this small contract will bring a series of benefits to investors:

The transaction fee for a small contract is even lower, at $0.50 per contract on each side, a levy of $0.07 per contract on each side, and a settlement fee of $0.20 per hand. In addition, there is a responsive margin write-off plan, which can be unilaterally offset by margin for both renminbi and dollar-denominated goods. Other benefits are as follows:

The new small contract trading mechanism is more flexible and there is no need to adjust monthly contracts. Ji Yuanfei of Guangfa Futures Development Research Center believes that on the one hand, it reduces the trading obstacles brought about by the tedious delivery process, on the other hand, it makes the mini futures contract free from the constraints of commodity attributes to a certain extent, and is conducive to the diversification of market participants. The participation of more investment institutions will increase the liquidity and activity of the contract, thus feeding back to the industrial arbitrage.

The launch of the small contract is mainly supplemented by the existing London metal futures contract denominated in offshore renminbi, which uses the official settlement price of LME and cash settlement of no physical metal delivery. The provision of new investment vehicles for retail and institutional investors who want to invest in smaller contract units and cash settlement will help provide additional trading opportunities for users investing in dollar-denominated base metals in the Asian time zone. it also provides another channel for the market to hedge against adverse price changes and promotes hedges and arbitrage demand in the Asian time zone.

The small contract unit is smaller than the London Metal Exchange's corresponding basic metal futures contract:

The existing LME copper, aluminum, zinc and lead futures contracts trading unit is 25 tons / contract, while the upcoming small contract is only 5 tons / contract; the existing LME nickel futures contract is 6 tons / contract, the small contract is only 1 ton / contract; the existing LME tin futures contract is 5 tons / contract, the small contract is only 1 ton / contract.

The small contract is the same as the basic metal futures contract trading unit corresponding to the current domestic futures market, which is helpful for each trader to improve the flexibility and matching degree of trading and hedge scale. When industrial customers do import and export arbitrage, because the trading units are the same, and the trading units are smaller, it is easier to match their bilateral trading positions and improve the efficiency of the use of funds. Cross-market arbitrage at home and abroad, more conducive to increase transaction flexibility and liquidity, in the matching does not have to be subject to the impact of higher contract trading units, can better match bilateral futures positions. Small and medium-sized enterprises and speculators will not have to limit their use of funds to higher contractual values and can adopt more flexible matching strategies.

About 30% of the trading volume of LME in Asia comes from Asia. Previously, domestic users needed to adjust their trading operations in the LME metal market, and most of the domestic users were industrial chain users, and the participation of financial users was not high. Following the launch of small contracts denominated in renminbi and US dollars by HKEx, HKEx has built a bridge for domestic and international commodity trading platforms to enhance the interconnectedness and liquidity of the global basic metals futures market. In addition, as the pricing center of global metal prices, the LME market will further improve its price discovery function after the integration of HKEx's electronic trading, and will be closer to the prices of the Asian market.

The Deputy General Manager of CUHK Futures / Jingchuan believes that the introduction of mini contracts by HKEx will enhance the liquidity of the metal commodity market and further enhance the fair value of prices. According to the general law, with the introduction of mini-contracts, the activity of the market will be enhanced. For the domestic market, the matching varieties will also be improved to a certain extent, the linkage at home and abroad will be strengthened, in the case of open windows at home and abroad, but also to a certain extent to promote the activity of the domestic market.

Dayou Futures Senior researcher / Zhang Shunqing believes that the launch of small contracts will enhance market influence and pricing power. Since the acquisition of LME, the introduction of small contracts in the Hong Kong Stock Exchange US dollar metal and RMB metal, at the same time combined with the bulk spot market established in Qianhai, later may also add a domestic LME delivery bank and so on is a complete combination plan.

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