Asian Exchange Update: CFFEX, SGX and HKEX By Joanne Morrison

Asia’s derivatives exchange landscape is changing rapidly. New technologies are being deployed to accelerate trading and interest in commodity futures is booming. Equally important, ’s government has allowed the introduction of stock index futures, the first step in creating what is likely to become an important new market.

n this article Futures Industry profiles three ambitious program to develop the fastest trad - Exchange of India and the Kospi 200 futures I Asian exchanges that are affected in dif - ing platform in the world. And Charles traded on the . In fact, based ferent ways by these trends: China Financial (Xiaojia) Li, who took the helm as chief exec - on June volume, CFFEX already trades more Futures Exchange, and utive of HKEX in January, is leading the futures contracts than either HKEX or SGX. Kong Exchanges and Clearing. exchange through a strategic reorientation That is a very fast start for a new con - CFFEX is the newest of the three, having based on closer ties to the mainland, the inter - tract, especially considering the constraints launched trading in April this year, but nationalization of the , and several on trading. The exchange has carefully lim - already the rapid growth of its index futures key technology upgrades. ited access to the new market and has set contract is moving up the rankings of the strict position limits, tough suitability region’s top contracts. In fact, the biggest requirements, and conservative margin challenge facing CFFEX is channeling the CFFEX: Carefully Cultivating requirements. enthusiasm for the new contract into greater a New Futures Market “The exchange encourages investors to understanding of hedging and risk manage - It took more than four years for China use stock index futures to hedge against risk ment. Under the leadership of Eugene Financial Futures Exchange to receive regu - rather than pursuing excessive trading vol - (Yuchen) Zhu , CFFEX has emphasized that latory approval to launch futures on the CSI umes and seeing it purely as a way to speculate the newly launched stock index contract 300 index, which covers 300 stocks listed on or even manipulate the market,” CFFEX said should be used primarily as a hedging tool. It the Shanghai and stock in response to questions submitted by Futures has sought to limit speculation by setting exchanges. Trading finally began in April Industry . “Therefore, the exchange cracks tight position limits, conservative margins and the new market immediately attracted down on market violations such as manipula - and tough investor suitability standards. very strong interest. tion and insider trading to maintain stable SGX and HKEX have been operating for Since the launch to the end of June, vol - trading volumes and safeguard an open, fair decades, but both exchanges have new leaders ume has averaged about 260,000 contracts and just market environment.” with plans to modernize their products and per day. The total trading volume for the The exchange was formally launched in services and seek new opportunities in the month of June was 5.44 million contracts. 2006 as a joint venture between five changing landscape. Magnus Böcker has That was the third highest among all stock Chinese securities and futures exchanges: unleashed a whirlwind of initiatives since tak - index futures traded in Asia, second only to Zhengzhou Commodity Exchange, Dalian ing over SGX in December, including an the Nifty futures traded on National Stock Commodity Exchange, Shanghai Stock

September 2010 45 Exchange, Shenzhen and educating market participants about the risen to 30,851 contracts, and the ratio of the Shanghai Futures Exchange. The CSI importance of innovation and the introduc - open interest to volume had more than dou - 300 is the first stock index future to be tion of hedging instruments. bled to 12.3%. traded in and during the CFFEX has set tough standards for trad - “Since the exchange began adopting four years before trading began CFFEX offi - ing in the CSI 300 futures contracts. Only hedging applications, customers have been cials concentrated on education. qualified sophisticated investors who can able to hedge their positions successfully in a “The exchange targets institutional prove they are financially sound and have regulated market,” CFFEX said. “With investors who aim to hedge risk using stock trading experience can trade in these con - increasing numbers of institutional investors index futures as key investors. However, tracts and the dealers who sell them are and an improved mix of market participants, China’s index futures are still at an early held responsible for making sure their cus - stock index futures will become a critical tool stage of development. It will take time to tomers are qualified. Individual Chinese for hedging.” form an experienced group of institutional investors must have a minimum of 500,000 At present, CFFEX has 130 members. investors,” CFFEX said. ($73,585) in their margin accounts, Among those are a handful of joint ventures Shortly after being formed as an exchange, and they must have conducted at least 20 with foreign firms, including Newedge CFFEX initiated a mock trading platform to transactions within a 10-day period on the Group through its partnership with help investors familiarize themselves with CFFEX mock trading platform or at least 10 Shanghai-based Citic International Futures stock index futures, and this training tool is transactions over the prior three years in Co., Guangdong-based J.P. Morgan Futures still used as part of its investor suitability the commodity markets. Co., and Royal Bank of Scotland through its regime. The exchange has also looked to other To encourage institutional participation, investment in Beijing-based Galaxy Futures markets for guidance. For example, how the authorities set the contract size at a rela - Brokerage Co. Foreign investors cannot Taiwan’s stock index futures market operates tively high level. The CSI’s value is currently trade in CSI 300 futures contracts yet, but has been discussed at several CFFEX educa - around 869,298 yuan ($127,935). In addi - the Chinese authorities are developing rules tional seminars. CFFEX also has consulted tion, officials have limited the maximum to allow foreign access through the “quali - with institutions including CME Group, position a trader can hold to 100 contracts. fied foreign institutional investor scheme,” Chicago Board Options Exchange, HKEX, Traders can apply for a bigger position which is the primary channel for foreign Eurex, NYSE Liffe, depending on the size of the stock portfolio investors to make onshore investments in and India’s National Stock Exchange. that they are seeking to hedge. mainland China’s stock markets. In April, “They provided valuable experience Most of the trading in the stock index regulators released proposals to allow foreign regarding stock index futures, for example, futures contracts so far has been among indi - investment in the stock index futures how to market the product, manage risk and vidual investors, but that is expected to grad - through this QFII scheme. Among other how financial institutions use stock index ually change as more hedge applications are things, the proposed guidelines set daily quo - futures to hedge their positions,” CFFEX said. approved and regulations allowing foreign tas on the value of positions and prohibit In 2006 the China Securities Regulatory investors to trade stock index futures are speculative trading . Commission appointed Zhu as general man - finalized. Some signs of that shift are already ager at CFFEX. Zhu had been head of the evident as the ratio between trading volume Dalian Exchange since 1999 and was for - and open interest has started to decrease as SGX Takes Steps to merly general manager and a senior man - more institutional investors come into the Become the Best and ager of Cifco, one of China’s first and market. Open interest at the end of April, Fastest Gateway to Asia biggest futures brokers. He has been at the the first month of trading, was 10,918 con - Since Böcker, a newcomer to Singapore, center of developments in China’s futures tracts, just 5.6% of the trading volume for has taken the helm, the former chief execu - markets for decades and has been active in that day. By the end of July, open interest had tive of OMX Group and architect of the

China Financial Futures Exchange

46 www.futuresindustry.com Seow Ann Gan and Muthukrishnan traded in the over-the-counter markets. In Ramaswami were appointed as co-presidents August, SGX added container swaps to its with a mission to grow SGX jointly with successful OTC freight clearing business, rec - Böcker. They have been with SGX since ognizing that the container trade has been 2001 and 2007, respectively. Sutat Chew, one of the fastest growing segments of the who has been with SGX since 2007, assumed global freight industry. Asian container traf - the role as head, corporate and market strat - fic is projected to account for 68% of the egy, also reporting directly to Böcker and world’s container exports and 56% of the overseeing the securities business. world’s container imports by 2015. Under Böcker’s leadership, SGX plans Earlier in the year, SGX launched an to invest S$250 million (US$178 million) OTC rubber forward clearing service in col - in a series of technology initiatives. A key laboration with Sino Rubber, China’s largest part of this plan is to build the world’s fastest rubber producer. Under this agreement, Sino trading engine with the lowest trading Rubber will facilitate the delivery of the OTC latency. The new trading engine is delivered rubber forwards that are cleared through through Nasdaq OMX’s Genium Inet plat - Sicom. “This is an interesting example of how form, Voltaire’s Infiniband solution and we work with China,” Böcker said. HP’s technology. In testing, SGX has estab - Böcker noted that SGX’s developments lished an average order response time of 90 in OTC clearing have been market-driven micro-seconds door-to-door, maintaining rather than politically driven. Without Magnus Böcker that this will be the fastest execution capa - this political pressure, SGX has been able Singapore Exchange bility in the world. to move quickly on plans to develop clear - The exchange plans to migrate its equity ing for financial OTC derivatives. “But Nordic exchange company has set out an products to the new platform in the first with all the changes that have happened aggressive agenda. This is fitting for an quarter of 2011 and its derivatives products over the last months, most of the markets exchange that is centered in one of the at a later date. SGX also plans to launch a have been delaying how they should do world’s busiest ports. new data center and new co-location services this,” he said of the U.S. and Europe. “I From day one on the job, he has main - in the first quarter of 2011. The new SGX think that we therefore might be far ahead tained that SGX is best positioned to become data center is already 90% sold out, accord - of many other markets.” the major gateway to Asia’s markets because ing to Böcker. In fact, SGX is ready to launch clearing of the pro-international business nature of The third piece of SGX’s technology for dollar-denominated interest rate swaps Singapore’s government, growing economic upgrades is connectivity, allowing investors later this year. At a later stage the demand in China, and Asia’s stronger foot - to connect directly to SGX from their home exchange plans to add foreign exchange ing in the wake of the financial crisis com - cities. “We will connect in Singapore, Tokyo, swaps to this service. pared to markets in the Western hemisphere. London, New York and Chicago,” said “We have now been working with our “I think being in this part of the world we Böcker. These hubs are intended to improve 10 international and local banks to build a see so many opportunities. A lot of our focus cross-border connectivity. facility to clear OTC interest rate swaps is to successfully launch new products, suc - Under Böcker’s leadership, SGX has here in Singapore,” he said. “We are very cessfully maintain and develop existing prod - added products in several areas. Several new pleased with this development. We estimate ucts, adding new memberships, becoming contracts have been listed in its equities to start clearing interest rate swaps during more attractive to new members and facili - complex, and the exchange is looking to the fall.” tating them through a state-of-the-art tech - expand the list of products listed on its nology platform,” Böcker told Futures Singapore Commodity Exchange subsidiary. Industry in an interview. As the economy in Asia expands, com - At HKEX, a Plan for One key part of Böcker’s strategic plan modities have been a key area of expansion Providing the Best was a new organizational structure unveiled for SGX. For example, Sicom launched trad - Access to Mainland China in June. Relying on the existing expertise at ing in Robusta coffee contracts and gold In less than two months after taking the SGX, 10 business units were created to focus futures, and has entered into an agreement post as chief executive officer, Charles Li on key products and customer segments. All with Tokyo Commodity Exchange that may orchestrated a three-year strategic plan that of this is intended to help bring new prod - lead to the cross-listing of certain commodity he says will help bolster the exchange as the ucts to the market faster. The business units futures. In addition, SGX has partnered with top choice for Chinese issuers and investors are broken down into specific areas such as the London Metal Exchange to launch met - and also as the exchange of choice for inter - broker services, clearing services, commodi - als futures in Asia. national investors seeking to access Chinese ties, derivatives, fixed income, listings, mar - “We have had an active last four or five markets. “The external environment, with ket data and access, sales and distribution months,” the 48-year-old executive said. the opening of the mainland market and the and securities. And there is more to come in terms of new rise of competing alternative trading venues, “We need to have the right staff, which products and new clearing services. has become more complex,” Li said in March we do, but also the right organization. That’s Over the last several years, the exchange when the HKEX strategic plan for 2010-2012 why we updated our organization,” he said. has developed its AsiaClear service, which was unveiled. “HKEX has to set out a plan to provides clearing for commodity derivatives address these challenges in the near to

48 www.futuresindustry.com tional exchange of choice to access ber of steps to develop an offshore RMB mar - Chinese markets? ket in Hong Kong. In 2007 mainland finan - In a nutshell, the strategic plan includes cial institutions were allowed to issue RMB more product offerings, more alliances and bonds in Hong Kong, and in July 2009 the better technology. On product offerings, the authorities began allowing cross-border trades exchange plans to consider anything from to be settled in RMB. Most recently, on July new equity listings to OTC clearing. Near 19, the central bank signed an agreement with term, equity-related futures and options seem the Hong Kong Monetary Authority that to have the most potential, given that HKEX’s allows interbank transfer of RMB deposits in most successful products today are stock index Hong Kong and removes limits on RMB futures and stock options. exchanges by companies in Hong Kong as “We are open to all possibilities. Nearly long as the funds remain in the territory. all of the current derivatives market turnover “The changes announced on July 19, with comes from equity-related products so that is respect to the lifting of restrictions on inter - most likely the area of expanding in the near bank transfers of RMB funds and the pur - term,” HKEX said in written responses to chase of RMB by companies without a cap, is questions submitted by Futures Industry . likely to accelerate the development of Hong The exchange also plans to extend trad - Kong as an offshore RMB center and have ing hours to better link HKEX to mainland important implications for Hong Kong’s China. “This is the key for our two markets financial industry,” according to economists Charles Li to be more compatible and more intercon - at Hang Seng Bank, one of Hong Kong’s lead - Hong Kong Exchanges and Clearing nected,” Li explained at a recent press con - ing financial institutions. The economists ference. The exchange said it will propose added that the internationalization of the medium term if it wants to maintain its com - opening a half-hour earlier, in line with the RMB will create “enormous opportunities for petitive edge, meet changing demands of its stock exchanges in Shanghai and Shenzen, the local financial industry” similar to those customers and position itself to capture long and shortening the lunch break to one hour seen during the development of the term growth opportunities.” instead of two. Moving to a longer trading Eurodollar market in London in the 1950s. Li took on the role as chief executive in day will be a challenge, however. More than For HKEX, RMB internationalization January. But the former oilfield worker, jour - a decade ago, a previous attempt was aban - offers the potential for the launch of new nalist, lawyer and investment banker has said doned in the face of resistance from local products. The exchange said it aims to posi - these challenges were on his mind even brokers and traders. tion HKEX as “the market of choice” for any before stepping in to run the exchange. Prior Li admitted it will be a difficult process but future offshore investments in securities and to taking the helm at HKEX, Li had been at emphasized that today’s environment is very derivatives by mainland investors. The J.P. Morgan since 2003 and had made impor - different. “Our market is no longer an isolated exchange also sees opportunity in offering tant contributions to the expansion of the market. We have the shortest trading hours renminbi-related products to meet the needs firm’s Chinese franchise. Li also worked for and also the latest trading hours. That doesn’t of investors from overseas. Merrill Lynch as president of Merrill Lynch really match up with our image,” Li said. “I think renminbi-denominated products China, responsible for its China investment One critical part of the strategic plan is are the future,” Li said at the interim results banking operations. Before moving to the completion of a new data center in 2013. press conference. “Obviously between here Merrill Lynch in 1994, he practiced law in The exchange is also working on upgrading and there is a long way,” Li added, noting New York with Davis Polk & Wardwell and its securities market system capacity. “The that success of RMB-denominated products Brown & Wood. Earlier in his career, he goal is to increase capacity in terms of order depends on the ability for investors to return worked as an oilfield worker and as a newspa - per second 10-fold from the current level and their RMB holdings back into mainland per editor-reporter for China Daily. to reduce latency,” HKEX said. China. “It’s going to be a tug of war,” he said, Shortly after taking his position at On the derivatives front, HKEX plans to adding that HKEX will work with policy - HKEX, Li set up a series of offsite meetings rollout by the fourth quarter of this year an makers in China to reduce restrictions. with experts at the exchange and also from upgraded trading platform and infrastructure. Still, when it comes to the challenges of other exchanges to address critical chal - Officials said this will increase order capacity facilitating mainland investor access to inter - lenges. Among those involved in those by about 150%. The design of the clearing national markets, the answer is: patience. talks were Xavier Rolet, the head of the system software is set to be upgraded around Not all of the challenges ahead for HKEX , and Robert the middle of next year, the exchange added. can be fixed by its strategic plan but rather by Greifeld, the head of Nasdaq OMX. The Looking farther out into the future, Li is policy changes in mainland China. exchange also heard presentations by top hoping to position HKEX as a beneficiary “We have to be patient…. Individuals investment bankers, economists and trad - from the Chinese government’s plans to inter - from the mainland won’t have complete ing specialists. nationalize the renminbi, China’s national access to our markets until policies change,” After that the exchange concluded that currency. Officials in Beijing have indicated HKEX said. ■ big changes are needed because mainland that they see Hong Kong as the “proving China is a global market and no longer a ground” for a gradual relaxation of the restric - Joanne Morrison is the deputy editor of Futures regional market. The question was how tions on cross-border currency flows. Since Industry . would HKEX set out to be the interna - 2004, China’s central bank has taken a num -

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