The London Metal Exchange is considering settling and clearing contracts in yuan, LME Asia md Liz Milan told Metal Bulletin on Thursday April 19.
As it works towards building its own clearing house, LMEclear, the exchange has sent questionnaires to its members asking what they would like to see in terms of functionality, Milan said.
The questionnaire asks members for their views on LME contracts in yuan.
Trading of contracts in yuan is not under consideration as there is no international convertibility for the currency, Milan added.
“If we were to do cleared and settled in just [yuan] and not traded, that will not be till LMEclear is launched in 2014,” she told Metal Bulletin.
“The gravity is obviously moving a lot more east now,” a category II member told Metal Bulletin, adding that the move would allow the LME to get into the Chinese market and make it easier for the Chinese to trade on the exchange.
The LME clears and settles contracts in yen, euros and sterling and has no plans to drop any of these currencies, Milan said.
“We would just add [yuan]. There is no question of removing something to add that,” she said.
LME members told Metal Bulletin that as long as the Chinese continue to relax their policies on the yuan, it will be beneficial for contracts to be settled and cleared in the local currency.
But a second category II member expressed concern about settling contracts in yuan as the currency cannot be traded offshore.
The only way the non-deliverable currency can be hedged now is through non-deliverable forwards, which are generally priced in dollars, he said.
But in recent months, China has taken steps signalling that it may be ready to allow the yuan to become a global currency.
On April 14, the People’s Bank of China said it would widen the dollar-yuan trading band to 1% from 0.5%.
London is also making efforts to become an offshore trading hub for the yuan, while HSBC said it plans to issue its first yuan bonds in London.
The UK treasury and Hong Kong monetary authority have agreed to provide help with a forum for banks to look at clearing and settlement systems, market liquidity and the development of new yuan products.
“We think that the wider circulation of [yuan] in London is a critical and positive step for the internationalisation of the Chinese currency. London accounts for 36.7% of the world’s total forex trading,” ANZ analysts said in a note to clients.