The expansion of derivatives in China has been a rocky ride.
The government and regulators have felt it necessary to
intervene on numerous occasions cooling the
country’s speculative and often over-heating
During the 1990s the main Chinese regulatory body for
exchange-traded derivatives , the China Securities Regulatory
Commission, took drastic action to clamp down on what it viewed
as unruly trading in derivatives. Over the course of two
"Rectification" programmes, the CSRC cut down the number of
exchanges from 40 to three and the number of contracts from 55
Today there are four exchanges: the Dalian Commodities
Exchange, the Zhengzhou Commodities Exchange, the Shanghai
Futures Exchange and the recently launched China Financial
Futures Exchange trading 26 contracts, all in the commodities
sector with the exception of the CSI 300 index contract traded
on the China Financial Futures Exchange.
Regulation surrounding the launch of new contracts is rigid
with the government approving just one contract per exchange
per year to launch. In addition, foreigners are currently
unable to access the Chinese derivative markets, although there
are plans to allow a small number of Qualified Foreign
Institutional Investors to trade the CSI 300.
Despite the low contract number, purely domestic
participation and high trading costs, volumes in China have
soared in recent years rising from 161m contracts traded in
2005 to 1.5bn last year. At last week’s inaugural
Derivatives World China, hosted by FOW and the Dalian
Commodities Exchange, an audience of 400 local and
international delegates heard a variety of views on China with
hot topics including international access to the markets and
the launch of options contracts.
With the QFIIs expected to begin trading on the CSI 300
index futures contracts as soon as the next quarter,
speculation is rife that the market may further open up for
foreign traders. In his keynote speech Jiang Yang, assistant to
the chairman at the CSRC, acknowledged the importance of
foreign traders in the development of the derivatives markets
hinting that access to commodities contracts may follow the CSI
300 futures (more on this in this month’s
Options trading, however, may take more time. All the
exchanges currently have proposals lodged with the CSRC to
launch options on some of their contracts but, like many things
in China, approval is likely to take time with one exchange
head predicting that it could take up to ten years before
options are traded on Chinese exchanges.
Fresh in the minds of regulators is the loss of $550m by
China Aviation Oil in 2004 on the back of selling OTC crude oil
calls (however, delegates at the conference correctly pointed
out that such a loss would not have been possible with the use
of exchange traded options contracts).
International exchanges are putting in the groundwork in
anticipation of an opening up of both the international market
to China and Chinese traders to international markets. Most of
the international exchanges are currently consulting with
Chinese exchanges and regulators on contract design and
contract launches, building up relationships and brand
awareness. As one international delegate said: "if you leave it
until they open up, you are too late."
For more on FOW in China, see this month’s
edition out next week.