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Banking & Finance

Decline in trades forces London Metal Exchange to rethink fees

Hong Kong owner hopes to revitalize weak commodities segment

Chief executive Charles Li Xiaojia discusses Hong Kong Exchanges & Clearing's first-half results on Wednesday. (Photo by Joyce Ho)

HONG KONG -- Hong Kong Exchanges & Clearing said Wednesday it will adjust the fee structure of the London Metal Exchange, which it purchased in 2012, in a bid to stem its trading decline.

Still relying on an old-fashioned open outcry system to set prices, the 140-year-old exchange has seen its activity diminish for two years now. Total trading volume fell 7.7% on the year in 2016, following a 4.3% dip the previous year. The average daily volume of metals contracts dropped more than 5% to 586,748 lots between January and July.

"Obviously the entire industry is going through a lot of difficulties, and LME is no exception," Charles Li Xiaojia, chief executive of HKEx, said in a briefing Wednesday. "One of the factors [why] the volume has declined, we believe, is that we have increased the fees across the board in the last commercialization effort."

Bought five years ago for 1.4 billion pounds ($1.82 billion at current rates), the LME is unusual in providing individual daily delivery dates designed for physical metal users. In an attempt to make the formerly member-owned commodity marketplace profitable, the HKEx raised its fees by an average 34% in 2015.

Li said the fee hike has allowed the London exchange to make a "huge" contribution to the group, accounting for "a fraction" of its profit. But it also has "the unintended consequences of shrinking the volume of the short carry." A special feature of the LME, short-dated trades enable users to roll positions over from day to day.

"Now we will be rebalancing that, and that hopefully will bring the volume back meaningfully in that particular sector," said the chief executive. "Those volumes are not necessarily for our revenue per se. It is really [for] making LME much more liquidity-rich throughout the short carry dates, which [are] currently now being discouraged because of the fees increases."

Li hopes the price rebalancing also will help recover the trading volume that has been lost to over-the-counter marketplaces.

"In the future we will find ways to work out an equitable way with our members for that revenue to begin to flow back to the exchange where it rightly belongs," said Li, adding that more "optionality" will be added "for financial players" to participate in the LME, which is more "physical and traditional" in nature at present.

Of all segments, commodities performed the worst for HKEx during the first half, with its earnings before interest expenses and other finance costs, taxation, depreciation and amortization, or EBITDA, down 14% to 440 million Hong Kong dollars ($56.4 million) on the year, versus a 21% increase in cash equity.

The cash equity segment was apparently helped by a vibrant stock market. The average daily turnover of equity products traded on the Hong Kong bourse rose 27% on the year, as inflows from mainland China through the mutual access program linking Hong Kong with the exchanges in Shanghai and Shenzhen, known as stock connects, surged 47% on daily average.

Following the extension of the trading links to Shenzhen in December, total revenue generated from the stock connects in the first half more than doubled to HK$162 million from a year ago, partly due to expectations for onshore Chinese stocks to get included in the widely tracked benchmarks compiled by Morgan Stanley Capital International.

Improved market sentiment also enticed more new listings to Hong Kong, which saw total funds raised from initial public offerings increase by 26% from a year ago to HK$54.8 billion. The bourse, as a result, pocketed HK$398 million in listing fees, 7.3% more than last year.

The net profit attributable to shareholders for the six months ended in June rose 17% on the year to $3.49 billion. Revenue climbed 10% on the back of a HK$120 million increase in net investment income, as better performance in the cash equity segment was partially offset by more subdued trading in derivatives amid low market volatility.

After the bourse operator announced its results during noon break Wednesday, its Hong Kong-listed shares headed southward, closing 1.2% lower at HK$227.8, capping year-to-date gains at 24.3%. The benchmark Hang Seng Index ended 0.4% lower while returning 26.2% so far this year.

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