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, China’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 Korea Exchange. 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, Singapore Exchange and utive of HKEX in January, is leading the futures contracts than either HKEX or SGX. Hong 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 renminbi, 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 Shenzhen 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 Stock Exchange 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 mainland China 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. yuan ($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, Tokyo Stock Exchange 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.