By Pratima Desai and Siyi Liu
LONDON/BEIJING (Reuters) -The London Metal Exchange (LME) is planning to launch new metals contracts using prices from the Shanghai Futures Exchange (ShFE), three industry sources familiar with the matter said, further increasing China's influence on global metals markets.
Collaboration between the 146-year-old LME and ShFE was mentioned briefly by LME's Chief Executive Matthew Chamberlain in October at the annual LME Week dinner, without any detail.
Two years ago the idea of China allowing an overseas exchange to use domestic prices would have been met with reluctance, but since then there has been a sea-change in strategic direction at Chinese exchanges, the sources said.
The change has come due to pressure on Chinese exchanges from the government to innovate and expand their influence to the rest of the world and China's aim of domestic players having more control over commodity prices.
Known as cross-listing, the process would involve new LME metal contracts settling against ShFE prices, the sources said. The sources did not have a timeline for launch.
The LME, the world's oldest and largest forum for metals trading, would pay ShFE a license fee and the new contracts would be cleared at the LME's clearing house, the sources said.
"During LME Week this year we announced that we intend to further deepen our collaboration with SHFE in 2024, by working together in product innovation to better serve international participants in risk management and price discovery,” the LME said in response to a request for comment.
Britain's Financial Conduct Authority which regulates the LME declined to comment and ShFE did not respond to requests for comment via email.
It is not known which metals are involved in this initiative, but copper and aluminium are both high volume contracts on both ShFE and the LME, owned by owned Hong Kong Exchanges and Clearing.
"If you want to trade a contract on the Shanghai Futures Exchange today, it's a long, costly and complicated process." one industry source said, adding that other Chinese exchanges were already cross-listing.
China's Dalian Commodity Exchange (DCE) in early November signed a licensing agreement for a soybean oil futures settlement price with a Malaysian bourse.
Options for foreign firms wanting to trade contracts listed at Chinese exchanges involve setting up operations in China or trading via a broker on the Shanghai Futures Exchange.
"With cross-listing, the LME would have a contract that settles against the ShFE price for its members. LME will be able to grow its volumes and income," a second industry source said.
"There are downsides. The LME would not have control, Chinese regulators have a lot of oversight over prices and they do intervene frequently ... What if ShFE decides to suddenly withdraw the license or refuses to renew it?"
However, even if LME members welcome the initiative, new contracts based on ShFE prices will need volume and liquidity to gain traction.
Most of the contracts launched by the LME in recent years have failed to gain traction.