HK yuan clearings of LME trades approved

An agreement was signed on Monday to enable yuan clearings in Hong Kong of contracts traded on the London Metal Exchange.

LME - the world's biggest marketplace for metal derivatives trading - signed the memorandum of understanding with Hong Kong Exchanges and Clearing Ltd and Bank of China Ltd. The MOU is set to open the gate for the trading of yuan-denominated commodity derivatives in the world's biggest offshore yuan center.

The move also marks a major step in the integration of the Hong Kong exchange and the London-based trading platform, after HKEx acquired the LME for $2.2 billion in December 2012.

HKEx - the world's second-biggest bourse operator - didn't provide an exact date for the launch of the yuan clearings, but said that it will start with base metals, which have the biggest trading volumes in the LME.

Aluminum and copper are among the most actively traded contracts on the LME, with a total of 160 million lots of future and option contracts traded in 2012.

The announcement comes after HKEx said last week that it wants to introduce its own yuan-denominated commodity contracts, including iron ore, coal and agricultural products. A trading platform will be ready in three months and contracts will be initially settled with cash, as opposed to the physical delivery required by the LME.

"The MOU entered into today marks the beginning of our collaboration to examine the feasibility of clearing LME contracts in yuan and the potential development of yuan-denominated commodity products in the HKEx Group platforms," said HKEx chief executive Charles Li.

"This collaboration also demonstrates our commitment to expand the membership base of the LME and to reach out to users of the LME in different markets," Li added.

BOC, one of the three note-issuing banks in Hong Kong, will most likely be the broker for the yuan clearings. Last year, Bank of China International Global Commodities, an arm of China's fourth-biggest lender, became the first Chinese clearing member in LME's 135-year history. Li said earlier this month that HKEx is mulling plans to lower the threshold for LME membership for Chinese institutions.

The MOU is also a further step in China's long-term strategy to make the yuan stand alongside the US dollar and the Japanese yen as a global reserve currency. On Sunday, central banks in China and the United Kingdom agreed on a 200-billion-yuan ($ 32.6 b) currency swap that is expected to promote the yuan's use in the UK and London as a new offshore yuan center.

Beijing has also reiterated recently that efforts will continue to push for the nation's capital-account convertibility, which is widely deemed as a prerequisite for the yuan to become a global currency.