- Lynnice Ng, Head of Marketing
Lynnice develops the marketing strategy for the MAS-licensed, Shanghai-headquartered brokerage firm based in Singapore, Orient Futures Singapore, and leads the team to execute sponsorship of events aligned with brand and business objectives.
With a Bachelor of Business degree and a Master of Arts (Contemporary China) from Nanyang Technological University, certificates of Capital Markets and Financial Advisory Services (CMFAS) Module 2A and Module 6A, she is passionate about the financial services industry and takes pride in providing value to clients and all, in the areas of content and events.
- Soon Yujian, Marketing Associate
Yujian is the content strategist and writer in the marketing department of Orient Futures Singapore.
With a Bachelor’s degree in English from Nanyang Technological University, he gathers insights about the derivatives industry and turns them into bite-sized news. He enjoys researching market news, industry trends, and reports. His research expertise is also readily presented in articles such as the QFI scheme, and informative articles such as the FIA article series.
About The Derivatives Landscape in China
In early 2015, interest in the China market garnered attention from institutional traders. Yet, concerns about the regulatory framework and a lack of access deterred overseas/offshore investors from entering the Chinese market. To address the advancements in the Chinese market and the QFII regime, this article will evaluate the discussions gathered from the FIA conference titled “The Derivatives Landscape in China”.
Additionally, the article will also reflect varying perspectives about the maturity of China’s derivative market for traders to obtain insights into the industry.
What Has Changed
1. Futures and Derivatives Law
The first key change is the Futures and Derivatives Law (FDL). The FDL is a comprehensive legal framework and legislation that took effect on 1 August 2022. Regulated by the Chinese government, and the China Securities Regulatory Commission (CSRC), it stipulates the enforceability of close-out netting in the PRC’S futures and derivatives market.
In the conference discussion, Mr Marcus Goi elaborates on the law, he explains that: “This implementation is a new milestone for the China market. It stipulates a strong legal foundation and has had an influence on traders in terms of price discovery, especially in commodity products.
Nonetheless, it is important for overseas traders to be informed of the details. At the end of the day, someone has to maintain engagement and pave the path directed by the law. if everybody acts on it, we will have earlier changes, and sooner is always better than later.”
2. Greater Range of Products
Following the discussion on FDL, the second key change is the greater accessibility to the range of Chinese derivative products.
Dr. Lawrence Zhang, Rotating Chief Representative, the Joint Office of the Chinese Commodity Exchanges clarifies: “There are two main ways to access China’s products, the first, is through trading internationalized products. And the second is trading through the QFII/RQFII schemes.” Over the years, products have been added into these two ways of trading, and products under the QFII/RQFII scheme account for 27 futures and 18 options as of date.
To add to the point, it is mentioned that the release of products was not done randomly. For products to be released to international traders by means of internationalized products or QFII, they must be beneficial to China and the public. This can take the form of increased productivity or a better economy for the country. Therefore, traders from both ends (China onshore traders and offshore international traders) remain cautious in trading.
3. Added Efficiency and Maturity
While legislation and an increased range of products are instrumental to the development of China’s derivative market, the transformation and growth of the derivative space also signify opportunities.
Mrs. Sharon Shi, Chief Executive Officer of G.H Financials Limited aptly lays the groundwork for why trading with China is important, she explains: “Since the first creation of MOFII/WFOE to the latest schemes such as QFI, bond connect and swap connect, the options for trade has diversified extensively. While more traders can trade in (Inbound trading), the same can be said for trading out of China. It is 2-way traffic. This is a great opportunity for investors to make use of the years of knowledge, skills and expertise gathered in the industry and gain an advantage from clear hedging tools and clear risk management.”.
Mr. Marcus Goi agrees and adds that: “The implementation of FTL is a summary of 30 years of QFII regime. Moreover, no physical delivery may encourage traders to use the scheme to execute trade strategies. However, the downsides are the ease of connection, and the application process which remains tedious”.
Both speakers acknowledged that there is a great opportunity for trade, which makes it paramount that we see the success of the QFI regime as an indicator of the market sentiment toward the derivative landscape in China.
What are the Challenges of These Developments?
A Web of Geopolitics and Systemic Complications
Faced with geo-political developments, there is greater interest in what is off the screen.
To begin, the panel commented that geopolitical events increase counterparty credits, and the China market has no pre-margin and almost no netting. These methods are not adopted widely across the board, hence, such forms of differences may be alien to traders that are seasoned in the other market structures (European or western trade exchanges).
Tangentially, other factors such as geopolitics, differences in policies, and rising interest rates by FED all create volatility. For brokerages like Orient Futures Singapore, it will be important to manage client risks and margin calls, these forms of risk and liquidity management safeguard the client’s funds as well as the role of clearing members. Ultimately, as Mr. Goi mentions, “calibrating the balance between thin margins, risk and liquidity is fundamental for intermediaries.”
In response, Mr. Bradley Fraser, Head of Prime Derivatives Services, Asia, Barclays points out that in the face of systematic challenges, “it must be a bottom-up approach (market guides) and top-down approach (appropriate regulations)”.
Overall, China may seem to be too conservative, but it is a step-by-step market where policies must be locked the place before proceeding. If regulatory organizations, intermediaries, exchanges, and traders can meet at a balancing point, progress will follow.
Which is the World’s Best Exchange?
Among the many challenges, China’s exchanges may face difficulties in standing out from the crowd. Mrs. Sharon Shi introduces the topic by asking “how China might make itself better, or outstanding among the 80 or so exchanges that have been in the market. In relation to their international counterparts, the Chinese exchanges are just starting.”
To address the problem, there were two main solutions:
- On one hand, it was mentioned that exchanges can stand out due to simple factors. For example, how easily can one access the market? Is the margin methodology incorporated into the mechanics of trade? Are there margin efficiency and FX controls put in place?
The plethora of micro factors ultimately differentiates the exchanges, and they will have to prove themselves to these benchmarks.
- On the other hand, the challenge also extends to foreign participants. With the range of services and regulations put in place, participants must understand the trading rules, clearing rules, and the dos and don’ts of the Chinese market.
Nonetheless, considering this two-fold challenge for the exchange and participants, it is important to understand that even with inefficiencies, the market is still very profitable, and some strategies are best applied here.
What do you Foresee in the Future?
As the discussion draws to a close, the panel agrees that the implementation of FDL has potential, and China should continue to open to benefit the clients and the larger community.
Besides, there are about 140 FCM onshore in China, if China can actively regulate and maintain onshore FCMs, efficiency is likely to improve substantially.
Lastly, if brokers can collaborate, the benefit to end clients will be positive and market integration or contributions to GDP/OTC values will have massive opportunities. It is a discussion of diversity and sustainability.
Leading back to the bottom-up approach, it is important to keep the market open and to maintain an open conversation among parties. At the same time, it is also crucial to have a top-down approach, in which regulatory organizations can investigate uncertainties and progress in terms of regulations and functions.
Start Trading With Orient Futures Singapore
Being an Overseas Intermediary of Shanghai International Energy Exchange (INE), Dalian Commodity Exchange (DCE), and Zhengzhou Commodity Exchange (ZCE), when foreign clients participate in internationalized futures contracts in these Chinese markets with us, they have direct access to trading, clearing, and settlement. Our parent company, Shanghai Orient Futures, is the largest broker in terms of aggregated volume across the five regulated exchanges in China.
Orient Futures Singapore also currently holds memberships at the Singapore Exchange (SGX), Asia Pacific Exchange (APEX), and Intercontinental Exchange Singapore (ICE SG).
We provide premium customer service at an affordable cost to all our clients. Our team will be there for you 24 hours on trading days to provide a one-stop portal for all your trades, with simple processes and an intuitive user interface that has low or near-to-zero latency.
