London 10/08/2016 - LMEShield – a warehouse receipt initiative from the London Metal Exchange (LME)and its parent company Hong Kong Exchanges & Clearing (HKEX) – could help rejuvenate bank financing in the metal industry, HKEX CEO Charles Li said on Wednesday.
A fraud scandal broke in June 2014 when it was discovered that warehouse receipts in the Qingdao port of Shandong province were being used multiple times to secure multiple loans against the same metals' stocks held there.
Financing business and metal trading volumes have since slumped in China. As well, banks there and in the West have cut credit lines to trading companies, especially for repo deals using bonded-warehouse receipts as deposit against loans.
But, talking at a press briefing on Wednesday, Li said that its warehouse receipt system would be a great opportunity for bank – particularly Chinese banks – to return after Qingdao essentially shut down a lot of financing activities.
“Now those activities are likely going to come back and LMEShield is going to play a very important role in revitalising that effort,” he said.
LMEshield issues and manages electronic receipts relating to commodities stored off-warrant. As of going live, it is available in 19 jurisdictions, including countries new to the LME storage network, such as India, South Africa and Chile, the exchange said.
Only warehouses approved for the LMEshield service will be able to offer LMEshield receipts. The receipt record can only be transferred electronically between registered and approved users of the system.
The LME has plans to expand the network with further eligible jurisdictions and commodities.
In other related developments Li said that the HKEX spot commodity platform was on track to start before LME Week Asia next year – the event typically takes place at the start of summer.
The onshore spot platform’s system development work is near completed and user testing should take place in a month’s time.
“We are now beginning a market survey on warehouses, [and are] having preliminary discussions - we anticipate serious warehouse negotiation, rule engagement and signing up and onboarding will begin after the fourth quarter of this year,” Li said.
HKEX had published its 2016-2018 strategic report in January, where it said it is exploring the development of a China mainland spot commodity trading and financing platform capable of 'physicalising' mainland market benchmarks.
Initially the platform would start with major base metal products, and would then gradually expand to other product categories. The platform would mirror the LME’s model and be based in Qianhao, Shenzhen.
The platform would create an “effective market” that would include commodity users, as well as intermediaries, that would provide trading, logistics and financing services.
HKEX and the LME have been vocal about their desire to increase their footprint in China, but have come up against political opposition. While the exchanges have yet to achieve warehouse recognition in this region, it is thought that it could use its new LME Shield warehouse-receipt system to gain access.
(Editing by Martin Hayes)