Fallout spreads in Hong Kong over shutting down of Mercantile Exchange

HONG KONG (Reuters) - A close political ally of Hong Kong's Chief Executive has vowed to cooperate with an investigation into the shuttered Hong Kong Mercantile Exchange (HKMEx) after the city's financial watchdog said it had alerted the police to "serious irregularities".

Exchange chairman Barry Cheung has also taken a leave of absence from several high-profile public positions as the police look into the futures platform. He has not been directly named as part of the probe.

The exchange, which operated a trading platform for gold and silver futures and had plans to launch contracts for base metals and yuan forwards, surrendered its licence to the Securities and Futures Commission (SFC) over the weekend, saying it did not have enough trading revenues to support its operating expenses.

Mr Cheung said in a statement: "The favourable conditions under which HKMEx was founded have not changed.

"The mercantile exchange and myself will cooperate fully with the police investigation," he told reporters, while declining to give further details given the ongoing probe.

The involvement of Mr Cheung threatens to add more pressure on Hong Kong's embattled leader Leung Chun Ying, who has close links with Mr Cheung. Mr Cheung ran Mr Leung's leadership campaign last year and sits on Hong Kong's core policy making body, the Executive Council.

Since taking office last July, Mr Leung has faced several scandals, mass protests and a failed impeachment bid.

"Given the police investigation, it is not appropriate for me to comment," Mr Leung told reporters on Wednesday when asked about Mr Cheung.

The SFC launched its probe into the mercantile exchange on May 15.

"In light of the evidence obtained, the SFC referred certain matters to the Commercial Crime Bureau as the suspected irregularities are serious ones," it said in a statement, referring to the CCB police unit. The commission did not spell out the nature of the irregularities.

Mr Cheung, who was also briefly chairman of Russian aluminium giant Rusal last year, is also chairman of the city's Urban Renewal Authority.

SFC officials said significant financial losses were not expected and open positions on the exchange had been completely closed. Collateral related to the HKMEx market was now also being returned to clearing members via the independent London-based clearing house LCH.Clearnet, it said in a statement.

Some lawmakers demanded more answers from the SFC and accused it of being slow to react.

"We have to uphold the standard of regulation in Hong Kong in order to gain the trust and confidence of the international investors," said opposition lawmaker Kwok Ka Ki.