Bank of China Moves to Enter London Metals Exchange

February 23, 2012 Posted by China Briefing Reading Time: 3 minutes

Feb. 23 – Bank of China International (BOCI) is moving closer to gaining membership on the London Metals Exchange (LME), following authorization by the UK financial regulator.

The possibility of admitting its first Chinese member – from the world’s largest metals market – will likely increase the LME’s trading volumes and add to the bourse’s attraction as a potential takeover target.

The 130-year-old LME – which handled a record US$11.6 trillion of contracts in copper and other industrial metals last year – has been considering a potential sale under the “right conditions” since last year. The metals bourse said last Friday that it had received a “good number” of first-round bids ahead of its board meeting on February 23.

BOCI, the investment banking subsidiary of the Bank of China, has recently received approval by the UK Financial Services Authority (FSA) for its global commodities unit, a Reuters report says.

The FSA approval marks a necessary step for BOCI’s application for category-II LME membership, which would allow the bank to access all types of exchange business, but not ring trading. Before it gains its final trading eligibility, the bank will still need approval from the LME as well as clearing house LCH.Clearnet, and must purchase LME shares.

While some LME traders worry that the BOCI participation will bring more competition by taking away the bourse’s existing Chinese customers, others are confident that the Chinese bank – which will help boost the overall liquidity of the world’s largest metals marketplace – will bring more benefit than harm.

Currently, only about 30 Chinese companies are officially licensed to do business with overseas brokers, and others go through companies in Hong Kong. The BOCI’s LME entry would help the Chinese mainland open up to further Western involvement, said a senior trader at LME interviewed by Reuters.

Echoing the senior trader’s opinion, Zhou Jie, an analyst at China International Futures (Shanghai), also expects more Chinese investors to trade on the LME through the bank.

One head of metals trading in London interviewed by Reuters is not so worried about BOCI’s comparative advantage in dealing with Chinese customers and believes the LME boasts its own strength.

“BOCI will know their customers a bit better, so they will have an inherent advantage, but Chinese customers are very price-sensitive. They will be loyal (to BOCI) to a certain extent, but they will occasionally find the grass greener on the other side of the fence,” he said.

BOCI may become the only Chinese bank that obtains the LME membership in the near future, thanks to its efforts to establish a commodities trading unit ahead of its domestic rivals.

It is said that the bank plans to start an iron ore swaps business this year, in a move to tap the surging demand for hedging from Chinese steel mills.

BOCI is also making attempts to link up with other foreign metals exchanges, especially ones that offer clearing of iron ore swaps. The bank was approved last year as a clearing member of the U.S. CME Group and is planning to apply for clearing membership in the Singapore Exchange, which handles the bulk of globally traded iron ore swaps volumes.

Dezan Shira & Associates is a boutique professional services firm providing foreign direct investment business advisory, tax, accounting, payroll and due diligence services for multinational clients in China, Hong Kong, India, Singapore and Vietnam. For advice on operating in or dealing with any of these markets, please email china@dezshira.com, visit www.dezshira.com, or download the firm’s brochure here.

State Council Restrictions Could Hurt China’s Exchanges

Global Economy Woes Dim Forecasts for China’s Copper Demand

China’s Pan Asia Gold Exchange: A New Playing Field for Speculators?