SMX will offer financially settled contracts, subject to obtaining regulatory approval from the Monetary Authority of Singapore. No launch timetable has been finalised.
However, the exchange hopes to be one of the first in the world to offer instruments of this kind. The New York Mercantile Exchange launched 500 tonne iron ore swap futures on July 12, but they have not traded yet.
Then in early September the Indian Commodity Exchange announced it was teaming with the Federation of Indian Mining Industries to develop iron ore futures.
SMX’s future will have a contract multiple of 500 times the index, which stood at $138.20 on Monday. A contract would therefore be worth about $69,000, or 500 tonnes of ore.
Thomas McMahon, chief executive of SMX, said the exchange would be the first to offer listed iron ore futures, as opposed to contracts linked to swaps or clearing services for over-the-counter iron ore derivatives.
“Historically, swaps have developed organically from benchmark futures,” McMahon said.
He said that while iron ore swaps had been successfully traded, they were more useful to financial market participants than buyers and sellers of physical ore.
McMahon said SMX’s futures contract would not only provide great market access, but also be more “efficient” and “transparent” in a regulated market environment.
Iron ore is one of the actively traded commodities in the world. In recent years Asian demand, especially from China, has come to be seen as dominating the market. McMahon said the futures “absolutely belong in Asia”.
The Metal Bulletin Iron Ore Index is also designed around the Asian market. It is designed to be an accurate representation of the seaborne merchant market for sinter fines delivered to China.
It is based on actual transactions, reported to Metal Bulletin (whose parent company, Euromoney Institutional Investor PLC, is the same as FOi’s). The index is updated daily, based on reports from market participants trading on a cost and freight (CFR) China spot basis.
The index is calculated for a base specification of ore trade, namely 62% iron content, delivered to Qingdao. Trades that differ from this, but fall within a target range, are used for the index with pricing adjusted according to formulae.
McMahon said he had been working on listing iron ore futures for several months. He had talked to all iron ore index providers but had settled on the Metal Bulletin Iron Ore Index as he believed it had a better methodology, with good partners that “subsequently tracks better”.
Platts and The Steel Index also offer indices.