Hong Kong New Gold Trading Platform

Hong kong new gold trading platform

Hong Kong plans new gold-futures platform

Hong Kong Gold Market

Introduction

The Hong Kong gold market is one of the most active physical gold trading markets in the world, and plays host to the traditional Chinese Gold and Silver Exchange as well as being a hub for a large number of investment bank precious metals trading desks.

Gold trading activity in Hong Kong helps set the tone for gold markets further west later in the day, and the market has been to some extent a price setter along with London and New York, and not just a price taker.

Hong Kong’s close links to China, and the recent collaborations between the Shanghai Gold Exchange and the Chinese Gold and Silver Exchange, have further increased the importance of the gold market in the Hong Kong Special Administrative Region (SAR).

The CME Group has also targeted Hong Kong with the 2015 launch of a one kilo gold futures contract which is physically deliverable in Hong Kong, while Hong Kong Exchange and Clearing (HKEx) is planning the launch of a Yuan-denominated gold futures contract.

Much of the gold being transported into the Chinese mainland from Europe and elsewhere had been routed via Hong Kong, particularly in 2013.

This has changed somewhat since 2014 when China began to import more gold directly, however, Hong Kong is still recording sizable gold imports, and re-exports.

Gold Contracts on the Chinese Gold and Silver Exchange (CGSE)

The Chinese Gold and Silver Exchange (CGSE)[1], founded in 1910, is Hong Kong’s only physical gold and silver exchange, and is run by the CGSE members as a society, hence the name Chinese Gold and Silver Exchange Society.

Hong kong new gold trading platform

The Exchange is now operated through a subsidiary company called ‘Hong Kong Precious Metals Exchange Limited’ which was established in 1994[2]. CGSE Member companies hold unlisted shares in ‘Hong Kong Precious Metals Exchange Limited’[3].

The CGSE has over 170 members, nearly exclusively local company members.

Oversight and supervision of the Exchange is provided by member representatives who are elected to executive and supervision committees every 2 years.

Six gold contracts trade on the CGSE, four of these on the Exchange’s electronic trading platform[4], the other two via traditional open outcry in the Exchange’s trading hall[5].

The CGSE electronic trading platform was launched in 2008.

The open outcry system trades a 99 Tael Gold contract and a 9999 Hong Kong Dollar denominated Kilobar Gold contract.

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The 99 Tael gold contract is the Exchange’s traditional traded product. The HKD Kilobar contract was launched in 2002.

The CGSE’s electronic trading platform trades a Hong Kong Dollar 999.9 Tael Gold contract, a Chinese Renminbi Kilobar Gold Contract (the world’s only RMB gold contract outside mainland China), a 100 ounce Loco London Gold contract, and a 10 ounce Loco London Gold contract.

The Renminbi kilobar gold contract was launched in October 2011[6].

The 999.9 Tael gold contract was listed in February 2013. Trading in the 100oz and 10oz loco London USD denominated contracts began in March 2008 when the CGSE launched its electronic platform.

Hong Kong Tael

In Hong Kong, a Tael, or Tael Troy, is a traditional Chinese precious metal weight measurement equal to 37.429 grams or 1.20337 troy ounces.

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A 5 Tael gold bar therefore weighs 6.01685 troy ounces (approximately 6 ounces). A tael troy can be subdivided into 10 mace troy and 100 candareen troy. Although the definition of Tael varies within Asia, the specifications for the Hong Kong tael troy are documented in Hong Kong legislation within an ordinance addressing weights and measures dated 30 June 1997, which was the eve of the handover of Hong Kong from the UK to China on 1 July 1997[7].

From 1949, Hong Kong regulations had required that only gold bar transactions of fineness less than 950 fine were legally permissible.

This led to price quotations of 945 fine gold on the CGSE, however most trading still remained in the traditional 99 fine Tael bars[8].

In 1970, the CGSE officially amended the fineness for official standard traded gold from 945 fine to 99 fine so as to more accurately meet the requirements of the jewellery industry, and to reflect the prevalent trading of 99 Tael bars.

CGSE Mechanisms

Gold contracts traded on the CGSE are for same day delivery, but the Exchange offers a contract deferment option which allows CGSE contracts to display characteristics of both spot and forward delivery, and so CGSE contracts can trade spot basis or on a forward basis, like a futures contract.

If contract delivery is not deferred, the contract trades spot for immediate delivery between the contracting parties.

Introduction

However, delivery of contracts can also be deferred in which case the trading parties agree to pay/receive a premium or carrying charge. If a seller wants to defer delivery, the seller pays a carrying charge to the buyer, and vice versa. Contracts can be deferred indefinitely and then closed out, and so are analogous to an undated futures contracts[9].

Carrying charges (for unclosed contracts) are determined on the Exchange at 10:30am for 999.9 Tael gold, 11:00am for 99 tael gold, and 11:15am for HKD Kilo Gold[10].

Trading hours on the floor of the CGSE are Monday to Friday from 9am to midday, and from 2pm until 5pm.

Open outcry deals are settled via the submission of contract notes to the CGSE settlement department, which updates member positions within its settlement system.

The CGSE informs relevant banks of the settlement transactions.

CGSE Electronic Trading Platform

Four gold contracts trade on the CGSE’s electronic trading platform:

  • Renminbi Kilobar Gold Contract, RMB
  • 999.9 Tael Gold Contract, HKD
  • 100 ounce Loco London Gold Contract, USD
  • 10 ounce Loco London Gold Contract, USD

CGSE Open Outcry Venue

Open outcry is a form of live trading on the CGSE where bid and offer prices are called out by participants, and communication also makes use of hand signals across the trading floor.

CGSE open outcry trading takes place in the CGSE trading hall through the Cantonese language.

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Two gold contracts are traded via open outcry:

  • 99 Tael Gold Contract (100 taels lot), HKD
  • HKD Kilo Gold Contract (5 kilo lot), HKD

Physical delivery of gold for CGSE contracts

Members of the CGSE organise physical delivery of the gold that they trade on the Exchange, and the Exchange is not involved in delivery.

However, the Exchange oversees an accredited delivery system.

A special category of CGSE member known as a ‘Bullion Group’ members are permitted to manufacture small gold bars for the Hong Kong market in the form of 999 fine 1 Kilogram bars and 99 fine 5 Tael bars.

These bars are classified as Hong Kong ‘Good Delivery’ bars. There are approximately 30 ‘Bullion Group’ members in the CGSE Society. The CGSE also fully owns and operates the ‘Hong Kong Precious Metals Assay Centre’[11].

The only bars deliverable for the 99 Tael gold contract, the 9999 Tael gold contract, and the HKD Kilo gold contract are bars manufactured by CGSE-accredited refineries (see below for list of CGSE-accredited refineries).

For the Renminbi Kilobar gold contract, acceptable delivery bars are 9999 fine kilobars manufactured by CGSE accredited refineries, or 9999 fine or 9995 fine kilobars accredited by the Shanghai Gold Exchange.

CGSE Five Tael bars that are produced by the CGSE accredited refineries are stamped with both the stamp of the refinery and the stamp of the CGSE[12].

Selected CGSE Member profiles

The full list of CGSE members can be viewed on the CGSE website[13].

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This list highlights the venues (open outcry / electronic) and gold/silver products that each member is authorised to trade. Many of the CGSE members are also members of the “Hong Kong Precious Metal Traders Association” (in Chinese 香港貴金屬同業協會有限公司)[14].

Some well-known CGSE ‘bullion group’ members which trade CGSE gold products and operate refineries include the following:

Wing Fung Precious Metals Ltd (CGSE Member No.34)

Wing Fung is a diversified bullion-focused group of companies which was established more than 30 year ago in Hong Kong.

It began as a precious metals bullion wholesaler but now includes bullion dealing, a gold refinery, futures dealing and online gold trading. Wing Fung trades all CGSE gold contracts and is a liquidity provider for the CGSE’s electronically traded loco London 100oz (LLG) contract, and 999.9 Tael gold (LTG) contract[15].

The Wing Fung refinery produces CGSE accredited and ‘WF’ branded 99 Five Tael gold bars, 999.9 Five Tael bars, and 999.9 One Kilo bars. Wing Fung states that it ranks in the top 3 in the Hong Kong market for physical precious metals transaction volume[16].

A selection of Wing Fung gold bars can be viewed on its website[17].

Wong Cha Company Ltd (CGSE Member No. 61)

Wong Cha Company Ltd is a CGSE bullion group member that trades all CGSE gold contracts. Wong Cha is a liquidity provider for both the CGSE’s RMB Kilo gold and HKD 999.9 Tael gold contracts, and it provides an online trading platform.

The Wong Cha refinery produces CGSE accredited 99 Five Tael gold bars, 999.9 Five Tael bars, and 999.9 One Kilo bars for the jewellery industry. Wong Sha’s website is listed under associate company Henfin[18].

Marigold Int Bullion Dealers Ltd (CGSE member No.

23)

Marigold International Bullion Dealers is a bullion group member of the CGSE and is authorised to trade all CGSE gold contracts.

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Marigold’s refinery produces CGSE accredited 99 Five Tael gold bars and 999.9 One Kilo gold bars[19]. Marigold received its CGSE license in 2008 after acquiring a former member of the Exchange.

First Asia Merchants Bullion Ltd (CGSE Member No 114)

First Asia Merchants Bullion (First Gold) was established in 1991 and is licensed to trade all CGSE gold contracts.

Hong kong new gold trading platform

Its refinery is CGSE accredited for the production of 999.9 Five Tael and 999.9 One Kilo gold bars[20].

CGSE Jewellery Company Members

A number of large and prominent Hong Kong gold jewellery companies are also CGSE members, such as Chow Tai Fook Jewellery Company Ltd[21], Luk Fook Bullion Dealers Ltd (part of the Luk Fook jewellery group)[22], King Fook Gold & Jewellery Company Limited [23], and Chow Sang Sang (through Chow Sang Sang Bullion Dealers Ltd[24].

Chow Sang Sang also runs a bullion wholesaler subsidiary called World Commercial Sales Ltd[25].

Shanghai-Hong Kong Gold Connect

In July 2015, the CGSE and the Shanghai Gold Exchange (SGE) launched the “Shanghai-Hong Kong Gold Connect[26]. The ‘Connect’ refers to exchange connectivity and cooperation between the CGSE and the SGE, and also extends to a CGSE trading room and precious metals vault in Qianhai in Shenzhen. Shenzhen is a city in the People’s Republic of China (PRC), about one hour’s drive from Hong Kong.

The gold ‘Connect’ initiative intends to integrate the Chinese ‘onshore’ and ‘offshore’ gold markets, as well as to boost Renminbi (RMB) gold pricing power on the SGE while furthering the PRC’s strategy of internationalising the Renminbi.

Details of the Gold Connect

CGSE has joined the Shanghai Gold Exchange (SGE) as a special international member.

The trading systems of the two exchanges (CGSE and SGE) have been linked together.

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More than 170 members of the CGSE members are now permitted to trade gold on both the Main Board and International Board of the SGE using offshore Renminbi. CGSE has also opened a gold trading platform and logistics operation in the Chinese Qianhai district of the Shenzhen free-trade zone, which includes a precious metals vault and assay centre.

The CGSE estimates that its members will trade up to 100 tonnes of gold per annum on the SGE.

In theory, this will boost trading volumes and liquidity on the International Board of the SGE, (i.e. the SGEI), improve pricing power of the SGE, and will therefore increase the importance of  RMB denominated gold pricing.

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If successful, the Chinese gold sector will also become more integrated to Hong Kong, since Chinese mainland customers of the CGSE can trade the CGSE contracts priced in HKD and USD.

The Shanghai-Hong Kong Gold Connect is modelled on the “Shanghai – Hong Kong Stock Connect[27] which was an earlier initiative between the Hong Kong and Shanghai stock markets that has sought to improve access and trading liquidity between the two stock markets, and the connectivity between Chinese A and H shares.

Chinese A shares are listed shares of mainland Chinese companies that trade in Renminbi. H shares are Hong Long listings of dual-listed Chinese mainland stocks that trade in Hong Kong dollars.

The CGSE Qianhai operation

The CGSE has opened a base in a free-trade zone (FTZ) in Qianhai, in Shenzhen.

The CGSE refers to this operation as its “Qianhai Precious Metals Logistics Assay Centre“. About 70 per cent of China’s gold jewellery is manufactured in Shenzhen.

The full CGSE operation in Qianhai is still being built and the vault will be complete in the first half of 2017.

When complete, the complex will have offices, a trading area, a precious metals vault (bonded warehouse) with a capacity of 1500 tonnes of gold, and a precious metals assay centre.

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Currently, CGSE is using temporary offices and a temporary vault in a building at the China Vanke Enterprise Dream Park in Qianhai[28].

Approximately 70 of CGSE’s 171 members are now trading out of Qianhai. Although it is in a free trade zone, the gold brought into Qianhai by the CGSE members still needs to be imported by one of the 15 Chinese banks approved to import gold into China[29].

The new ‘Connect’ approach improves logistical efficiencies since the CGSE members (gold traders) can now deliver gold to customers in Shenzhen and Shanghai, although gold will still technically have to be exported from the Shenzhen FTZ to the Chinese mainland.

Previously, Hong Kong gold traders had to transport gold from Hong Kong to jewellery factories in Shenzhen.

The Shanghai International Gold Exchange has appointed Bank of China (Hong Kong) Limited (BOCHK) as its sole settlement bank for the funding and payments processing for cross-border gold trading transactions on the Gold Connect. BOCHK is a clearing bank for RMB in Hong Kong[30].

Prospective Singapore – Hong Kong Gold Connect

In November 2015, the CGSE announced that it had been in discussion with Singapore Exchange (SGX) about launching a Singapore – Hong Kong Gold Connect based on a similar model to the Shanghai – Hong Kong Gold Connect.

This would allow CGSE members with a Hong Kong Securities and Futures Commission (SFC) license to become remote trading members of the SGX and trade the SGX Gold Kilo contract[31].

This SGX contract has seen very low trading volume since its launch in October 2014, so the Connect would be a way for SGX to potentially increase participation in the contract, and would also facilitate CGSE member access to the Singapore gold market.

CME Group Hong Kong Gold Futures Contract

In March 2015, the CME Group launched a US dollar denominated Gold Kilo futures contract (ticker GCK) which is physically deliverable at approved precious metal vaults in Hong Kong.

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The futures contract’s price quotation is for US dollars per troy ounce for delivery of a 1 kilo gold bar of 9999 fineness. Although the contract is pitched as a ‘Hong Kong’ gold futures contract, it trades on the CME’s electronic Globex platform and clears through the CME’s clearing platform Clearport[32].

Listed months for the kilo gold futures are the current month, next 2 months, and any February, April, June, August, October and December within a
12-month period. Delivery day is the 3rd Wednesday of the contract delivery month, as specified on the CME website[33]. On-exchange trading volume for the GCK contract is relatively low, ranging from approximately 200 to 600 contracts per trading day, and open interest is minimal[34].

The CME Gold Kilo futures contract can be traded on the CME Globex trading platform (i.e. on exchange), but it can also be traded bilaterally off-exchange (OTC), with the trades then sent to CME’s Clearport for clearing.

In January 2015, the CME announced a market-maker program for its COMEX gold kilo futures contract which authorised up to 10 market maker participants who “must quote continuous two-sided markets… at predetermined average bid/ask spreads and minimum quote sizes”.

In April 2015, the CME raised the allowable number for the program to 12 market makers[35].

CME Approved Hong Kong vaults

The CME Group has approved and licensed 3 vaults/warehouse facilities in Hong Kong for storage of kilo gold bars which can be used in settlement of the CME gold kilobar futures contract. These 3 vaults are run by:

– Brinks Inc

– Malca Amit Secure Logistics Ltd

– Loomis International (HK) Ltd (formerly Via Mat)

Similar to the CME daily warehouse gold inventory report for the COMEX approved vault facilities in New York and surrounding areas, CME also publishes a daily warehouse gold inventory report for the three Hong Kong approved vaults[36].

For a discussion of eligible vs registered gold and warehouse warrants, please see the relevant topics under the ‘US Gold Market‘.

Malca-Amit’s vault facility in Hong Kong, opened in 2012, is located beside Hong Kong International Airport at units G30-31, Airport Freight Forward Centre, Check Lap Kok.

The Loomis vault is at unit 701, Global Gateway, 168 Yeung Uk Road in Tsuen Wan. Brinks’ vaulting facilities are in the ATL Logistics Centre, located at the Kwai Chung Container Terminal in Kwai Chung.

The HKIA vault at Hong Kong International Airport, run by HKIA Precious Metals Depository and owned by the Hong Kong Airport Authority, also submitted an application for approval by the CME as a designated vault facility for CME’s Hong Kong gold kilobar contract.

This application was submitted in December 2014, at the same time as Brinks and Malca Amit applications, but then HKIA withdrew its application again in June 2015[37].

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Later in June 2015, the CME approved Loomis Hong Kong as an approved depository for the it’s gold kilo contract[38].

Hong Kong Exchanges and Clearing Ltd

Hong Kong based gold futures products are not a new phenomenon.

In August 1980, a US dollar denominated 100oz gold futures contract  representing 995 fine gold was launched for trading on the floor of the Hong Kong Commodity Exchange. This contract was deliverable against gold held in approved London vaults [See “Gold: A World Survey” Rae Weston, 1983, published by Crook Helm].

Hong Kong Commodity Exchange subsequently changed its name to Hong Kong Futures Exchange Ltd (HKFE) in May 1985.

The HKFE then suspended its gold future contract in the 1990s due to low trading volumes.

In March 2000, Hong Kong Futures Exchange Limited (HKFE), the Stock Exchange of Hong Kong Limited (SEHK), and Hong Kong Securities Clearing Company Limited (HKSCC) all merged together to create Hong Kong Exchanges and Clearing Ltd (HKEx)[39].

In October 2008, HKFE launched a cash-settled gold futures contract. This HKFE gold futures traded on the HKATS derivatives platform and cleared through the HKFE Clearing Corporation Ltd with Wing Fung Futures Ltd acting as a market maker.

These gold futures represented a US dollar quotation for 100oz of 995 fine gold, based on loco London delivery. The contract’s settlement price used the London Gold Fixing morning benchmark[40].

This contract was itself suspended by HKEx on 13 March 2015 due to lack of trading volume. This de-listing also coincided with the replacement of the London Gold Fixing with the LBMA Gold Price benchmark, so it appears that it was felt there was no point in amending the contract specification for a product that did not trade[41].

Hong Kong Gold Market

At the time, HKEx stated that it would review the redesign of its gold futures contracts products.

In December 2015, BullionDesk reported that HKEx plans a new Hong Kong based 99.99 kilobar gold contract denominated in Renminbi, which would be deliverable in Hong Kong vaults[42].

In February 2016, Bloomberg reported that HKEx CEO Charles Li said that “a yuan-denominated gold contract is also in the works”[43].

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Note that HKEx acquired the London Metal Exchange (LME) in December 2012[44], and that even though the LME is predominantly a base metals exchange, it too is planning to list gold futures contracts[45].

SPDR Gold Trust – Hong Kong listing

The SPDR Gold Trust (GLD), which is primarily listed in New York on NYSE Arca, also has a secondary listing denominated in HK Dollars on the Hong Kong Stock Exchange (HKEx) under ticker 2840

CGSE Renminbi Kilobar Gold

Exchange:

Chinese Gold and Silver Exchange

Venue:

Electronic trading platform

Launch Date:

17 October 2011

Contract size / Trading unit:

1 kilogram

Lot size:

1 kilogram

Currency:

Traded and settled in Renminbi

Price tick:

RMB¥0.01 per gram.

Trading hours:

7:00am – 5:00am (the following day)

Grade / Quality:

“Accredited No.1 (fineness 9999) or No.2 (fineness 9995) gold bar of Shanghai Gold Exchange”  and/ or “1 kg Kilobar or 3 kg Kilobar  manufactured by CGSE-accredited refineries (fineness 9999)”

Participants:

Only CGSE members that have been approved to trade on electronic trading platform for the RMB contract.

Delivery:

Physical delivery at designated locations specified by transacting parties

Settlement:

Daily settlement price determined at 11:55 am during morning session.

“Price determination in physical delivery and clearing at 3:00 pm”

Settlement banks:

Wing Hang Bank and Bank of China (Hong Kong) Ltd

Contract Premium:

“Premium of Renminbi Kilobar Gold shall be negotiated among 4 CGSE’s designnated bank members and 3 independent gold dealers….based on RMB funding cost” 

CGSE 999.9 Tael Gold

Exchange:

Chinese Gold and Silver Exchange

Venue:

Electronic trading platform

Launch Date:

14 February 2013

Trading Unit:

100 Tael

Price Quotation:

HKD/Tael

Minimum Price Fluctuation:

HKD1 per tael

Fineness:

9999 and higher 

CGSE 100 oz Loco London* Gold

Exchange:

Chinese Gold and Silver Exchange

Venue:

Electronic trading platform

Launch Date:

March 2008

Trading Unit:

100 ozs

Price Quotation:

US/oz

Minimum Price Fluctuation:

USD0.01/ounces

Fineness:

995 or higher

Trading hours:

Monday to Thursday (HK time): 7:00am to 5:00am next dayFriday (HK time) 7am – 3am (following day)  in summer time, and 7am to 4am (following day) in winter time* Loco London refers to settlement location = London
  • All specifications for the 10 ounce Loco London contract are identical to the 100 ounce Loco London contract except the trading unit is 10 ozs
 

CGSE 99 Tael Gold

Exchange:

Chinese Gold and Silver Exchange

Venue:

Open Outcry

Trading Lot:

100 taels

Price quotation:

HK$ per tael

Minimum Price Fluctuation:

HK$ 0.5 per tael

Fineness:

990 fine

Trading hours:

Morning session and afternoon session -Monday to Friday: 9am – midday and 2pm – 5pm

Premium Calculation:

HK$ per 100 taels.

Premium is fixed at 11am each trading day

Settlement Price:

Monday to Friday at 11:30am and 4:30pm 

CGSE HKD Kilo Gold

Launch Date:

2002

Trading Lot:

5 kilograms

Price Quotation:

HK$ per gram

Minimum Price Fluctuation:

HK$ 0.01 per gram

Fineness:

999.9

Premium Calculation:

HK$ per 5 kilograms. Premium is fixed at 11:15am each trading day

Settlement Price:

Monday to Friday at 11:30am and 4:30pm 

CME Gold Kilo Futures

Exchange:

Comex

Exchange Owner:

CME Group

Trading Venue:

CME Globex

Contract Name:

Gold Kilo Contract

Trading Unit / Contract unit:

One kilogram (32.15 troy ounces)

Block Trades:

Minimum 10 trades

Grade & Quality:

minimum 9999 fineness

Price Quotation:

US dollars and cents per troy ounce

Minimum price fluctuation:

$0.10 per troy ounce

Trading Schedule on CME Globex:

Sunday – Friday 6:00pm – 5:15pm with a 45-minute break each day beginning at 5:15pm.

Settlement Method:

Physically Deliverable

Product Code (on Globex, ClearPort and for Clearing):

GCK

Listed Contracts:

Current calendar month, next two calendar months, and each February, April, June, August, October, and December within a 12-month period beginning with the current contract month

Termination Of Trading:

3 business days prior to Delivery Day

Delivery Period:

Delivery occurs on 3rd Wednesday of the delivery month

Delivery locations:

CME Approved vault facilities in Hong Kong SAR

Maintenance Margin:

USD 1210 per contract

CME Rulebook chapter:

114