Chinese brokers set to trade futures offshore

CME Group is working with Chinese regulators to help more brokers trade derivatives overseas. This would enable mainland institutions to better hedge their commodity risks.
Chinese brokers set to trade futures offshore

China looks set to allow domestic futures brokerages to trade on foreign derivatives exchanges by moving to expand a pilot programme to involve more participants.

The programme – started in 2011 by the China Securities Regulatory Association (CSRC) and China Futures Association (CFA) – will soon expand from three brokerages to 20, says Julien Le Noble, CME Group's Asia-Pacific head.

The move could enable mainland fund managers to access offshore-listed commodity futures and options through their local brokers.

CME is certainly moving to court the buy-side more in Asia, in light of its hire last month of Adam Kamyar as director of hedge funds and asset managers for client development and sales, based in Hong Kong. (He moved from hedge fund Winton Capital, where he was a senior trader.)

“The ability of Chinese traders and risk managers to get exposure to trade in overseas markets will benefit the development of the Chinese financial market,” Le Noble tells AsianInvestor. “This is as important as Chinese regulators allowing more foreign participation in their domestic market.”

The pilot programme was designed to prepare domestic brokers to trade and help clients manage their risk using offshore-listed options and futures. (The three brokers initially included in the pilot were Cofco Futures, China International Futures and Yongan Futures.)

Senior management from local brokerages received training from CME in August to deepen their knowledge of the international listed derivatives market. Le Noble says another round will start in April.

Futures brokerages will likely initially be allowed to trade in offshore exchanges only for hedging and risk management purposes, say industry players.

Chinese brokerages are already active trading metals, agricultural products and other commodities on the Shanghai Futures Exchange and bourses in Dalian and Zhengzhou. The pilot will give them the skill-sets to help China-based corporates and other end-users hedge their pricing risks, says Le Noble.

This makes sense, as China is the world’s largest importer of copper, iron ore and many other commodities, the prices of which are often set by benchmark contracts traded on exchanges such as CME or Ice. Chinese brokers were in fact allowed to use offshore exchanges until 1994, when the State Council ordered a halt following the closure of several firms.

Beyond China, the room for trading growth in Asia as a whole is immense, says Le Noble, “as not everyone that should be using derivatives is doing so”. He thus sees the potential for double-digit growth of CME's market share in the region, as against single-digit growth in the US.

Asked about recent consolidation among exchanges – such as the $2.2 billion takeover of the London Metal Exchange by Hong Kong Exchanges and Clearing (HKEx) – Le Noble says it is beneficial for the liquidity of Asian derivatives markets.

The CME does not view the bigger HKEx as a threat, he adds, as the US group is also innovating products to tap into areas where HKEx currently claims leadership. For example, CME plans to launch an offshore renminbi futures contract on February 25.

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