November 12, 2014 / 5:23 AM / 5 years ago

Comex copper steals march over LME in battle for Asia trade

* Comex copper trading outperforms LME in Asia time over 3 months

* Chinese hedge funds find Comex copper cheaper, easier to use

* LME working to boost liquidity of contract

* At stake is market share in biggest consuming region in world

By Melanie Burton

SYDNEY, Nov 12 (Reuters) - Asian traders are increasingly choosing CME Group Inc over the London Metal Exchange (LME) for buying and selling copper, as they seek to cut costs and complexity of trade.

The trend could mean an erosion of Hong Kong Exchanges & Clearing’s (HKEx) dominant market share in its premier metals contract on home turf. The HKEx purchased the LME two years ago for $2.2 billion.

CME’s Comex copper contract traded volumes during Asian hours have exceeded that of the LME’s three-month contract in more than 80 percent of trading days over the three months to end-October, an analysis of tonnage traded electronically showed.

While only data over the past three months is available to Reuters, traders say the trend has emerged this year and become more noticeable in the past six months. At stake for the two exchanges is business from a new breed of users in the biggest copper consuming region in the world.

Chinese hedge funds have become a new force in metals markets, evident in a huge Shanghai-driven price rout in March, as their U.S. peers bow out, hurt by higher regulatory costs.

The China funds are turning to the CME for copper as they are finding its monthly contracts cheaper and simpler to use, industry participants said. Many already trade its oil and gold futures contracts.

Comex copper is a standardised futures contract with a single settlement date each month. Positions are marked to market on a daily basis and can be netted out within each month, giving opportunities to realise profits more quickly.

But the LME is a forwards market, so a profit or loss on a contract can only be realized at the time of settlement, meaning traders have to carry positions on their balance sheet until they expire.

That means players need to keep more capital at hand compared with Comex trading, a risk that can deter some potential new entrants, like the China funds, who may favour simpler products.

“A large part of it is the big Chinese hedge funds,” said one Hong Kong-based broker, citing the reason for the jump in Asian trades on Comex. “They have trouble getting their heads around the LME’s prompt date system. They prefer the monthlies because they’re easier to trade and now are more liquid.”

The LME contract can be more volatile, since liquidity is spread across daily dates out to three months, rather than as a single monthly date (see graphic). And traders can only access LME contracts via an LME member’s network, unlike the CME where they can access the exchange’s contracts directly.

“It’s only in the last six months or so that Comex volumes are larger than LME volumes on a day-to-day basis. But it almost feels now that it has taken over,” said a trader in Singapore.

CME acknowledged the growing interest in Comex copper from China.

“We are seeing strong interest from Chinese commercials in testing out our physical delivery mechanisms of copper and aluminium contracts as they see the significant increased use of Comex futures onshore as a hedging tool,” said Yvonne Zhang, director, metal products, at CME.

When asked to comment about LME losing market share in its Asian business to the CME, an LME spokeswoman said in an emailed reply that in the year to June, 17 percent of all three-month outright business traded on the LME electronically was transacted during Asian hours.

LME FEE HIKE TO PINCH

Some physical traders have been drawn to Comex copper and away from the LME product because the LME has flagged a 34 percent increase in trading fees for next year, said another broker in Hong Kong.

“Certain types of clients, even the physical guys, try to use (Comex copper) as an element of their business strategy - cheaper exchange fees, cheaper commissions, and simpler pricing,” the broker said.

To be sure, the data analysed by Reuters does not give the full measure of LME’s relevance. The data does not capture Asia-based industrial hedging business priced through the LME’s rings or bilateral deals that use the LME as reference for pricing.

The LME’s copper contract is still the world’s biggest by volume. It accounted for two-thirds of the combined 1.14 billion tonnes of copper traded electronically in the year to September.

The Shanghai Futures Exchange notched up nearly one quarter of the total traded, while Comex copper volumes stood at just over a tenth, data from the exchanges shows.

Still, the LME is working to funnel more liquidity into a particular expiration date each month, sources told Reuters last month, while owner HKEx said last week it may revise its planned fee hike.

“Genuine hedging still takes place on the global benchmark, which is the LME,” the Singapore trader said. (Editing by Muralikumar Anantharaman)

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