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Brexit hindering HKEx's commodity links with UK, China

The U.K.'s exit from the European Union is slowing down Hong Kong Exchanges & Clearing Ltd.'s launch of a London-Hong Kong connect, which aims to introduce futures products of the London Metal Exchange to Hong Kong and mainland investors, according to CEO Charles Li.

"We are now regulated by the European regulator as U.K. is still part of the EU today. It will take a year or two [for the European regulator] to approve [the connect]. But by the time it is approved, [the] U.K. would have been already out of the EU," Li told reporters at a media event in Hong Kong on Jan. 19.

Apart from the delay to the London-Hong Kong connect, Li expects Brexit to only have a limited impact on the LME or the bourse.

"If the regulation environment changed, I am sure there would be a lot of regulatory issues that we will need to comply with. But I don't expect additional costs because we are already in a position to comply with regulations in the European sense, which has a higher cost hurdle," Li said, adding that the LME is a global business instead of a local one.

Meanwhile, the absence of a London-Hong Kong connect also weakens the bourse's ability to negotiate with commodity exchanges in mainland China, according to the chief executive.

"We have tried for a number of years to connect to domestic commodity exchanges. We do not have much success in those connects because there [are] not many products in Hong Kong to connect with," Li said.

"London and Hong Kong need to be connected first. But because of the Brexit, it is hard for us to have a conversation," he added.

Li Gang, co-head of market development at the HKEx, told SNL Metals & Mining at the sidelines of the event that negotiations with three major commodity exchanges in China — Dalian Commodity Exchange, Zhengzhou Commodity Exchange and Shanghai Futures Exchange — had been halted.

Apart from Brexit, changes in China's regulatory environment also limit the bourse's plans.

"Chinese authorities have become more cautious in terms of the financial market regulations after the stock market crash in 2015, and the currency appreciation since the second half of 2016 also makes capital outflows undesirable for authorities," he said.

"But the main idea of the commodity connects is to introduce domestic investors to overseas products," he added.

The connections with the LME and China's big three commodity exchanges, together with the establishment of a spot commodity trading platform in the city of Shenzhen, are key objectives of the bourse's three-year strategic plan from 2016 to 2018.

HKEx has no deadlines for connects with London or mainland but expects to launch the trading platform in April as previously planned, according to Li.

The CEO added that the bourse will continue to explore commodity opportunities but will be focusing a lot more on other agendas, such as stock connect extensions.

"Some of our plans are progressing slowly and it is not up to us to decide when they can be finalized," he said. "We are still negotiating with different parties and things could happen very quickly. Once the situation changes, we will adjust our agenda at any time."