HKEX, SGX IN IRON ORE ‘WARS’

Hong Kong bourse eyes Singapore’s lead, waiving fees on new product for six months to attract traders

CALL it the iron ore wars. Two of Asia’s financial heavyweights are going head-to-head as Hong Kong Exchanges & Clearing Ltd (HKEX) starts futures for a commodity that’s seen extraordinary volatility and been a popular way to bet on China, challenging Singapore Exchange Ltd’s (SGX) leading position.

HKEX began trading the futures yesterday, pitting the new dollar-denominated contract against those offered by SGX, which introduced its first swap contracts in 2009 and has become the world’s largest clearer of the derivatives.

To add firepower to the opening salvo, HKEX has promised newcomers all trading fees for the new product will be waived for six months.

Iron ore sits at the heart of the global economy, especially in largest user China, and the commodity has attracted growing investor interest in recent years.

The derivatives are used by miners and mills for hedging, as well as traders and funds, and Goldman Sachs Group Inc found in a last year’s study that it was SGX’s product that probably swayed the global market, rather than the more restricted offering on the mainland’s Dalian Commodity Exchange.

Given the lead, the HKEX may find it a hard task to break out of its beachhead.

“They’re going up against a more established offshore contract in Singapore,” said Marex Spectron analyst Tan Hui Heng.

“It’s too early to gauge whether the new contract will gain much traction. Some of that will depend on the terms they’re able to offer, such as trading fees and margins, as well as the liquidity of the contracts.”

That’s been a boon for SGX, where trading of iron ore derivatives jumped 59 per cent last year.

Among other global exchanges, CME Group Inc and Intercontinental Exchange Inc also offer products tracking the raw material.

While HKEX has been building up its presence in metals — buying up the iconic London Metal Exchange — the new offering is its first ferrous product.

“HKEX believes this contract is going to be complementary,” said a spokesman.

“With active onshore iron ore futures on the Dalian Commodity Exchange and the heavy weighting of China in the trading of iron ore and iron ore derivatives, HKEX believes a transparent offshore iron ore futures will allow more efficient and timely price interaction among the markets.”

Trading will run from 9am to 4.30pm before a second session from 5.15pm to 1am. The SGX product is priced against the same spot index, and trades from 7.25am to 8pm, with an overnight session that runs through 4.45am.

Beyond trading hours, there are other differences. Hong Kong’s new futures were mostly traded electronically, unlike the SGX AsiaClear contracts, where more than 85 per cent of transactions were done over-thecounter (OTC), according to the Singapore bourse.

“If you look at volumes on the SGX today, the majority of that is coming from the OTC community — meaning buyers and sellers who execute the transaction through the broking community,” said SGX head of commodities William Chin.

“Brokers are helpful when it comes to reaching out to clients in marketing the contract,” he said.

They’re going up against a more established offshore contract in Singapore.

TAN HUI HENG

Marex Spectron analyst