China is set to launch its first options product open to trading by overseas investors as the country accelerates efforts to expand the domestic derivatives market to meet growing demand for hedging tools by foreign institutions.
On Thursday, the Shanghai International Energy Exchange (INE), a subsidiary of the Shanghai Futures Exchange (SFE), released draft rules (link in Chinese) for a crude oil options contract along with a notice that simulated trading (link in Chinese) will take place on the exchange from May 10 to May 21.
As part of the regulatory framework for options trading, the INE also released a draft of updated rules that set out the rights and obligations of overseas investors and intermediaries who had been excluded from a set of management measures (link in Chinese) for the market that went into effect on Jan. 21, 2019.
Overseas investors in Chinese mainland financial markets have long complained about insufficient access to hedging and derivatives instruments that would allow them to bet both ways on the direction of stocks, bonds and commodities and manage their risks. In response, China pledged to develop the derivatives market and give overseas investors greater access. In September, the government announced it would expand the derivatives market by letting foreigners use financial futures, commodity futures and options.
China’s lawmakers are also deliberating on the country’s first law specifically for the domestic derivatives market. Although titled the Futures Law, a draft recently made available for public comment covers a broader range of derivatives, including options.
A derivative is a contract with a value that is based on fluctuations in an underlying asset, such as stocks, bonds, agricultural and industrial commodities, currencies, interest rates and their corresponding indexes. Common derivatives include futures contracts, forwards, options and swaps. Businesses and investors use them as a tool to mitigate risk. While a futures contract gives an investor the obligation to buy or sell the underlying asset at a predetermined price at a predetermined time, an options contract gives an investor the right but no obligation.
China’s first yuan-denominated crude oil futures contract made its debut on the INE in March 2018. It was the first domestic commodity futures product open to overseas investors.
Crude oil options can serve as an effective supplement to crude oil futures, help enrich the product offering in China’s crude oil market, provide the oil industry with a more complete set of risk management tools and meet the needs of related enterprises for complex risk management, an unnamed INE executive said in Thursday’s statement (link in Chinese).
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In Depth: China Speeds Up Expansion of Derivatives Market
China has so far developed 12 options contracts for commodities over the past four years, including those for copper, gold and rubber listed on the SFE, and options for sugar, cotton, purified terephthalic acid and methanol traded on the Zhengzhou Commodity Exchange.
Plans to launch crude oil options “as soon as possible” as part of a strategy to expand the energy derivatives market were flagged by Wang Fenghai, the SFE’s general manager, at a futures conference in Shenzhen in December. The SFE also intends to offer more products including options for silver and rebar, as well as futures for alumina and synthetic rubber, he said (link in Chinese).
Contact reporter Luo Meihan (meihanluo@caixin.com) and editor Nerys Avery (nerysavery@caixin.com)
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