Commodities Bubble Bursts as Hong Kong Mercantile Exchange Calls it A Day

The Hong Kong Mercantile Exchange (HKMEx), Hong Kong's premier commodity bourse that was established in 2011, has handed in its notice to the financial regulator, the Securities and Futures Commission (SFC), as the exchange is unable to maintain capital requirements set by the financial watchdog to operate as an Automated Trading System (ATS).

In a statement on the SFC's website, the regulator stated: “An authorized ATS provider must have financial resources sufficient for the proper performance of its functions and obligations.” The Exchange informed the SFC on the 18th of May 2013 that it will withdraw its license to operate in Asia’s leading financial center.

Unfortunately for the HKMEx the news of its withdrawal have not come in isolation: The SFC reported on the 21st of May that it had initiated an investigation into suspected irregularities in the financial affairs at the exchange. Details from its official briefing state: "In light of the evidence obtained, the SFC referred certain matters to the Commercial Crime Bureau (CCB) as the suspected irregularities are serious ones. For obvious reasons, it was not appropriate to disclose these matters to HKMEx or to the public pending further steps in the investigation. Those steps were taken earlier today. The SFC will continue its investigation and will cooperate fully with the CCB.”

The exchange was established in 2011 as neighboring China has been leading the commodity space as the largest consumer and producer of several commodities. It aimed to Bridge commodity trade flow from China and the west, Chinese exchanges are domestic centric and overseas players have limited access. The bourse (HKMEx) provided local firms in China and Hong Kong a venue that matched contracts offered by US and European exchanges (USD denominated) in their own time zone.

The five year gold rally which saw the yellow metal reach a high of $1910 in August 2011 was a positive sign for the exchange which initiated with precious metals contracts.

However, the news come as a surprise as the exchange has been reporting strong metrics in relation to new firms becoming members; it reached forty members in April 2013. Apart from metals contracts denominated in USD the exchange planned to launch RMB denominated commodity contracts thus giving China based traders arbitrage opportunities.

Hong Kong has been a preferred destination for offshore Chinese yuan trading, the interbank CNH contract derives from Hong Kong and the Hong Kong Exchanges and Clearing Limited (HKEx) was the first Asian venue to launch yuan futures.

The closure of HKMEx puts a blow in Hong Kong's reign as the ideal China business access point. Singapore has also been sharing a similar goal and has been right behind the ex-British colony, Singapore's trading bourse, the SGX, plans to launch Yuan futures in Q3 this year.

Derrick Ngor, General Manager at ADS Securities in Singapore said in a comment to Forex Magnates:”The low trading volumes on the Hong Kong Mercantile Exchange (HKMEx), leading to its closure does not come as a surprise to the industry since Hong Kong is known for its equity-focused market with a limited offering on commodities contracts. Although there may be repercussions on investor confidence, it is an opportunity for Singapore’s SGX and SMX as investors look towards alternative central clearing houses.”

Asia's industrial revolution has meant the region is heavily consuming commodities. India the second most populous Asian nation has been gradually increasing its stake as a commodity trading hub as the country has launched it's 6th exchange earlier this year.

The growth in commodity trading venues comes with no surprise as participants have limited opportunities to trade as international markets are inaccessible.