At a time when Greece and Europe are hanging onto the edge of a cliff with their fingernails, and Iran and the 5 nations +1 are trying to stop another war in the Middle East, a turf war between the financial economy, the banks, and the real economy, the consumers and producers has been fought and won. The winner was the real economy, and the battle was over the trading of the global metals market.
The London Metal Exchange, known as the LME, is a 135-year-old member owned exchange. It has been the subject of a bitter bidding war between the U.S.-based Intercontinental Exchange (ICE ) and the Hong Kong Exchange and Clearing (HKEx). While ICE essentially represents Wall Street Banks, and their derivative Ponzi trading schemes, the LME and HKEx represents real consumers and producers. The core difference is that under an ICE model, the interests of the intermediaries, the banks, come first, where transactions occur for the sake of profit to the intermediary. While under the HKEx model, the exchange is much more of a peer to peer system where HKEx acts in the interest of the end user, and facilitates real transactions, which represent real value.
With the center of gravity for exchanges clearly moving east with the LME-HKEx deal, risk and risk management is a key consideration moving forward. The synergies between LME and HKEx have the clearing of trades at the core. HKEx already clears all their trades through the London Clearing House (LCH) as does the LME. In terms of spreading market risk, this is important as there will be a much bigger pool of capital to support the clearing of market trades through LCH on behalf of real consumers, where of course the real capital is.
Other bidders for HKEx would not make assurances that they would not move the clearing to a new clearing mechanism. The risk of course was that a clearing system would be set up by the banks, for the banks, using bank capital (credits) not real capital ('end user' - producer and consumer capital) with the result being market risk increasing as less capital is clearing more trades. The market would then be vulnerable to any large price movements with the risk being banks running out of capital, a familiar story now to most of us. The key difference is that with the LCH, end consumers would be more supportive of the market risk, while under an alternative bid, intermediaries would be expected to support the market risk.
While all the other bidders for the LME, IntercontinentalExchange, CME Group and NYSE Euronext are U.S.-based, the HKEx was the only non-U.S.-based bid. Since the HKEx has pretty much gone from “zero to hero” in one swoop with the purchase of the LME, the LME also gets new found market reach. As part of their bid, the HKEx has promised to increase the participation of Chinese companies and traders on the LME. This of course would be no small addition, as China’s thirst for base metals is pretty much unrivaled in the world. However, it is not just consumers that HKEx is likely to attract. The Australian metals market is also likely to gravitate towards HKEx, as China is a key buyer of Australian metals so HKEx will also bring producers.
However, the benefits for the LME to scale its business does not stop with just the increase of Chinese and Australian companies. The Hong Kong Mercantile Exchange (HK Merc) is also a new player on the block, trading gold and silver futures contracts, and they also use the LCH to clear their trades. On top of this, the president of the HK Merc also sits on the board of the world’s largest Nickel producer, Norilsk Nickel, which happens to be Russian. Russia and Hong Kong have been going to great lengths to raise the profile of Russian companies in Hong Kong, including listing Norilsk Nickel for trading. It is not impossible to think that the HKEx and the HK Merc work in tandem in regards to products, or even merge the two groups.
HKEx has pledged to tackle the problem of metals storage and delivery. Storage of metals has become the big game recently with banks and trading houses buying up all the available storage facilities and encouraging producers to send metal straight to storage. The banks and trading houses of course get huge storage fees, but they also have put a stranglehold on the delivery cycle of metals, with consumers bitterly complaining about the time taken for delivery, or being held ransom by the banks and the traders for spot delivery. This storage also hinders the real price of metals since the true state of supply and demand is kept hidden.
Finally, and worst of all, this metal is funded by “Muppet” investors who have been sold “inflation hedging” funds by investment banks and who thereby cause the very inflation they wish to avoid. You couldn't make it up. But unfortunately, the banks did.
The significance of the merger of the LME with HKEx should not be underestimated. In the development of 21st century resilient and networked markets, it is a big step in the right direction and may mark the beginning of the end of the “Dark Side” of markets. This merger has created a link between real consumers and producers which will increase the participation of Russia, China and Australia to the LME network, while reducing the role of the banks. This can only be positive for the markets going forward.
The views expressed in this article are the author's and do not necessarily represent those of RIA Novosti.
Current markets are anything but global or integrated. What if we had a paradigm shift in the way we think and transact when doing business with each other? Balanced global trade can only occur if we have transparent, accessible and efficient markets. We are on the cusp of achieving this, although most people cannot see it. Sam’s Exchange aims to give its readers a clearer view and a platform for discussion. Markets, trade and economics are in fact nothing more than the result of our thoughts and actions expressed in numbers, not the reverse.
Sam Barden is founding Partner of SBI Markets DMCC, a Dubai-registered commodities trading and advisory company. Barden has worked in the global financial markets for more than 17 years in Europe, Russia and the Middle East. He has advised and executed strategic transactions for both the government and private sector, in particular in energy and commodity markets, advising various energy producing nations on their strategic market developments and interaction. He holds a degree in economics and finance from Victoria University, Melbourne, Australia.
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