* HKEx seen planning monthly commodities contracts - industry
* May turn LME Asia reference price into tradable contract - traders
* Asian benchmark price suffers from lack of liquidity - industry
* Exchange seen opening its membership outside of London
By Melanie Burton
SINGAPORE, March 1 Hong Kong Exchanges & Clearing Ltd is likely to launch monthly metals contracts as part of a plan to boost business with mainland China and justify its $2.2 billion purchase of the London Metal Exchange, senior metals industry executives and traders said on Friday.
HKEx this week unveiled a preliminary timeline of developments for the LME as it posted results that showed shrinking profits and a core loss for the exchange it acquired in December last year.
HKEx also said it planned to launch a suite of commodity contracts for the Asian time zone backed by a new clearing house as soon as next year. It also flagged further developments in its Asian reference price, which traders said could act as a backbone for new contracts.
HKEx is likely to start with metals contracts that could prove a template for expansion into ferrous metals, such as iron ore and coking coal, industry executives say.
"Monthly contracts are probably seen as a big advantage because you could potentially beef up volume with Asian daytime liquidity," said Jeremy Goldwyn, a director in charge of broker Sucden's business development in Asia.
"It's a single-date system so therefore you can trade that electronically much more easily. People would probably be happy to put in a bit more liquidity which at the moment doesn't exist."
When asked about monthly contracts, the LME said it was looking at a range of options for Asia, but had no specific plans yet.
Monthly contracts could unlock liquidity that has so far been conspicuously absent from the LME's Asia time zone.
The LME's complex prompt date system is designed to let users hedge every day out to three months, spreading liquidity across that timeframe. A monthly contract would concentrate volumes on a single day a month, which could attract more investors.
The success of its future contracts may hinge on the development of the LME's Asian reference price, which will be aligned with the Shanghai Futures Exchange close from June 3.
"It's a question of whether or not the Asian benchmark can migrate into being the reference price for physical transactions," said Mike Frawley, global head of base metals and listed products for brokerage Jefferies Bache in New York.
"There is every possibility it will, but it will take time."
Because it is just a reference price, the LME's current Asian benchmark is widely ignored by traders, who would prefer a tradeable contract. Industry executives expect the LME to make the reference price tradeable down the line.
Many traders also say the benchmark does not really represent the Asian market, because it is backed by a contract that is deliverable anywhere within the LME's global network of warehouses, which span from Vlissingen to Detroit.
A lack of liquidity is also undermining the Asian benchmark, said Leong Chean Wai, a managing director at the commodity derivatives and treasury markets division of Singapore's DBS bank.
"You want more liquidity, you need to have more members," she said. "The HKEx needs to change its membership structure."
"When we first started up we looked at getting LME membership, but you have to have physical operations in London, so you can be registered and audited by the FSA," Leong added.
For its LME business, the HKEx has further ambitions: it plans to introduce RMB clearing services, extend its warehouse network into the Chinese mainland next year and explore tie-ups with Chinese commodity exchanges.
This is a departure from the LME's traditional way of doing business: some of its newest contacts, such steel and LME minis, have proven unpopular and metals industry executives and investors say this is partly because the LME did not listen to the market when it was developing the products.
"HKEx are undertaking considerable effort to sample the market to establish exactly what user expectations are," said Jefferies Bache's Frawley.
Many traders wonder how HKEx will execute its strategy to boost profits at the LME, and HKEx officials have been coy about their exact plans. But some executives and traders are still willing to give the HKEx the benefit of the doubt.
"It's an ever-moving target and maybe the HKEx have a lot more up their sleeve than perhaps people think," said Sucden's Goldwyn. (Editing by Miral Fahmy)
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