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 [转帖]The Dawning of Financial Futures in China |
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youhighness
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来自: 哲里木盟科尔沁左翼中旗木里图苏木爱搞不搞嘎查
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作者：youhighness 在 海归商务 发贴, 来自【海归网】 http://www.haiguinet.com
Author: Nick Ronalds and Wang Xue Qin
Date: 2006-12-19
China took a big step in the development of both its financial and risk management markets when it officially inaugurated, on Sept. 8, the China Financial Futures Exchange in Shanghai. This exchange will extend into the financial sphere an industry that's already thriving in commodities. Since the 1990s, the Dalian Commodity Exchange, the Shanghai Futures Exchange, and the Zhengzhou Commodity Exchange have been trading a healthy slate of commodity futures, such as copper and fuel oil at the SFE, soybeans and corn at the DCE, and sugar and wheat at the ZCE.
FuturesIndustry - China took a big step in the development of both its financial and risk management markets when it officially inaugurated, on Sept. 8, the China Financial Futures Exchange in Shanghai. This exchange will extend into the financial sphere an industry that's already thriving in commodities.
Since the 1990s, the Dalian Commodity Exchange, the Shanghai Futures Exchange, and the Zhengzhou Commodity Exchange have been trading a healthy slate of commodity futures, such as copper and fuel oil at the SFE, soybeans and corn at the DCE, and sugar and wheat at the ZCE.
Volume should top 200 million contracts this year, an impressive increase from 27 million in 2000. Some 183 firms provide brokerage and support services.
To be sure, the launch of the new exchange was a bit of an anti-climax, since it was accompanied by no product launch or even an announcement of a launch date. Still, the official establishment of a financial futures exchange was a clear sign that financial futures will not be long in coming.
And though we did not have a launch date as of late October, when this article was written, much about the new exchange is taking shape.
Ownership
The competition among existing futures and securities exchanges for the right to launch financial futures products was fierce. A stock index contract, to name just the first planned product, is universally expected to be a hit. But in China, neither exchanges nor products are launched on an entrepreneurial basis. With memories of the chaotic proliferation of exchanges in the mid-1990's still fresh, the regulatory authority, the China Securities Regulatory Commission, has kept a tight grip on what is listed and where. Hence the stakes were high for the rights to financial futures.
The solution to the ownership question was Solomonic. Each of the five existing mainland Chinese exchanges梩wo securities exchanges, three commodities梘ets an equal share in the new financial futures exchange. The Shanghai Stock Exchange, the Shenzhen Stock Exchange, the Shanghai Futures Exchange, the Dalian Commodity Exchange, and the Zhengzhou Commodity Exchange each get a 20% equity stake in the CFFEX. The registered capital of the CFFEX is RMB 500 million (about $62.5 million at $1 = RMB  .
The CSRC has named Zhu Yuchen, formerly head of the Dalian Exchange, as general manager, a position equivalent to president at U.S. exchanges. Zhu spent a nine-month internship at the Chicago exchanges in 1990, when he was a midlevel official of China's Ministry of Commerce. Shortly after returning to China he left the ministry and became a senior manager of Cifco, one of China's first futures brokers and still one of the largest. A chairman had not been selected as of end- October.
Structure
Exchange rules are still under discussion, so the information available is somewhat tentative and based on published reports and informal documents made available by key CFFEX planners. The following overview therefore should be regarded as tentative and subject to modification before actual trading begins.
The membership structure of the CFFEX resembles that of many Western exchanges, such as Eurex. That is, the various categories of membership are suited to different types of enterprises and have duties and obligations corresponding to their privileges. Foreign firms cannot become members directly, but it is possible, though difficult, to form joint ventures with local brokerage firms. The rules were developed in a collaborative process involving the exchanges, the CSRC, member firms, and the major financial market players expected to be active participants, such as banks and securities firms. The membership categories are:
Trading clearing member: can clear its own proprietary trades as well as trades done on an agency basis. This category will be the choice of futures commission merchants that cannot afford full clearing membership. TCMs may not clear for non-clearing brokers. Minimum capital: RMB 50 million.
Full clearing member: can clear both proprietary and agency business, and in addition can clear for non-clearing brokers. Minimum capital: RMB 100 million. Only licensed futures brokers may be full clearing members.
Special clearing member: may clear on an agency basis only. This category is restricted to banks, which are prohibited from engaging in proprietary trading. The capital requirement will be RMB 200 million, twice that of full clearing members, because the banks are expected to do large volumes on behalf of customers.
Non-clearing members wishing to trade for their own account only need capital of just RMB 10 million. For both proprietary and agency business, the requirement is RMB 30 million.
Several of the categories above refer to proprietary trading on the part of futures commission merchants. At present proprietary trading by FCMs is strictly prohibited. The memberships are structured on the assumption that this prohibition will be lifted. When this might happen is uncertain; a change in the relevant law has to come first, and it is likely that this will not happen until sometime after the launch of the contract.
Table 1 summarizes the capital requirements and other fees for these categories of membership. In addition to the indicated capital requirements, all members must meet the following rather stringent operational and management criteria:
Be a registered legal entity with all required business licenses.
Be of good reputation with a strong management history
Have committed no serious legal violations in the prior five years.
Have a management structure in place suited to the business and its membership category.
Be able to demonstrate a strong system of internal risk control, including real-time risk management and IT systems.
Have qualified personnel at all levels
Meet other conditions that the CSRC and/or the exchange might require.
The hurdles, particularly the financial ones, are quite high by Chinese standards. And clearly, they leave considerable room for subjective judgment by the exchange and its regulators. This rigor flows from a determination to avoid any repeats of the abuseprone environment of the 1990s. The membership requirements allow the exchanges and regulators to limit participation in the new market to firms deemed responsible and qualified, and with enough on the line to make rule violations a risky proposition.
Member Firm Obligations
An essential aim of the membership structure of a futures exchange is to promote financial integrity. Members have certain privileges, such as the exclusive right to clear trades and perhaps advantageous market access. In return they guarantee their customers and, beyond that, the integrity of the exchange in the event of default of another clearing member.
The CFFEX has adopted a tiered default payment model recognizable to those familiar with Western exchanges. As the first line of defense, a clearing member is responsible for all obligations of its customers. If a customer's default causes the default of the clearing member, a "common bond" kicks in: all clearing members contribute to making good on the deficit. The contribution will be based on a formula, probably related to a clearing member's size as measured by historical volume and/or open interest.
When that limit is reached, the exchange's "Risk Fund," which will build with time based on a transaction fee, becomes the last line of defense. Exchange or clearing fees have not been officially announced, but knowledgeable observers indicate the fee will be one-tenth the value of the multiplier. For example, if the multiplier is 300, the fee would be RMB 30, i.e., (about $3.75). Of that, 20% will go toward the Risk Fund.
When proprietary trading by FCMs is allowed, customer funds will be segregated but commingled, as is the case in the U.S. In other words, the customer funds will be segregated from the FCMs' own funds, but the customer funds will not be segregated account by account. Instead they will be in one consolidated account at the exchange (for required margins) and/or at a bank (for excess margin).
Products
The first product will be a stock index contract. based on their desire for an underlying instrument that was both representative of the total market and resistant to manipulation, the exchange's planners and regulators selected the Shanghai-Shenzhen 300, or "Hushen" 300 index. This index, which was created in April 2005 in the expectation that it would become the basis for a futures contract, is a capitalizationweighted index of 300 representative Ashare stocks. Under China's two-tier system, "A" shares are tradable only by residents, while identical "B" shares, smaller in number, are tradable only by foreigners.
The market capitalization of the index as of mid-October was about RMB 3.5 trillion and embraced some 67% of the total combined market capitalization of the Shanghai and Shenzhen exchanges, considerably more than the other Chinese indexes in wide use. Its correlation to the total market is 0.978, higher than all the other widely used indexes with the exception of the S&P 300, which had the same correlation over the past year. The value of trading over the past year was over RMB 2.2 trillion, and average daily turnover was 1.29%. (The statistics on market capitalization and correlation are from a presentation by Li Hongyang, Shenzhen Financial Engineering School, Nankai University, at the FOW 13th Derivatives & Securities World conference in Singapore on Oct. 4.)
Currently a small number of foreign investors are permitted to trade the A shares under the CSRC's "qualified foreign institutional investor" rules. QFIIs will not be allowed to trade the index futures, but the adoption of a similar approach for financial futures is likely in the future.
Table 2 shows key contract specifications. The multiplier is 300. Smaller multipliers were considered, but what won the day was a desire to keep the contract big enough for hedgers and too big for the potentially vulnerable small speculators. based on an index of 1450, the approximate level at end- October, a multiplier of 300 would imply a value of RMB 1450 x 300 = 435,000 RMB, or $54,375 (at $1 = 8 RMB).
The maximum daily limit move will be 10%. If the market moves 6% up or down from the previous day's close, however, a 10 minute trading suspension goes into effect. Thereafter trading resumes and the 10% limit move is in effect.
A revision in the securities laws late last year lifted the prohibition on stock lending. However, neither stock lending nor short selling will be possible until the CSRC issues detailed regulations on the subject. When this will happen is unclear at present, but it is virtually certain that short selling in the cash market will not be possible by the time the contract is launched. The inability to sell cash equities short will have the effect of inhibiting arbitrage when futures are at a discount from fair value. An indication of what to expect is provided by India, where short selling is also prohibited and the Indian stock index futures contracts, the S&P CNX Nifty, indeed frequently trades at a discount. Simulated trading for the Hushen started on November 6. Participants include over 80 institutional investors, most FCMs, and over 3,000 individuls. Even some reporters will be in the fray, practicing participatory journalism.
Other Products
The Hushen contract will be first off the block, and clearly it is the focus of all the attention for now. But additional contracts for the new exchange have already been discussed. Jiang Yang, the assistant to the CSRC Chairman and former President of the Shanghai Futures Exchange, was quoted in a Sept. 11 report in China Futures Market Weekly that after the stock index contract, there will follow "a slew of other financial futures and options." A bond contract leads the pack, and foreign currency futures are under discussion.
Foreign Participation
Non-residents cannot trade Chinese futures. Chinese firms owned or partially owned by foreign capital would be legally Chinese and hence could do so. Eventually laws will be relaxed to admit foreign traders, but this will likely happen gradually, on the QFII model of the equity markets. A QFII is a well capitalized, reputable institution granted an investment quota that it in turn allocates among customers. The QFII approach allows Chinese regulators to open the market gradually while exerting quality control. Initiation of such market opening measures are unlikely before the end of next year.
Foreign firms are already permitted to buy up to 49% equity stakes in Chinese FCMs and thereby participate in the Chinese futures market as brokers. To date, Dutchbased ABN Amro Bank is the only institution that has taken this route.
Challenge to Commodities?
The prospect of competition from a new financial futures exchange has aroused anxiety among the established commodity exchanges, which fear cannibalization of speculative volume. But others in the commodity sector see the new products as a welcome stimulus that could help spur a range of innovations and enhancements. Possibilities include enhancements in margining systems such as netting of positions and cross margining, exchange linkages, more efficient frontend systems, and better customer service for the industry as a whole. The possibility of exchange mergers to usher in a combination of such benefits in one fell swoop is being discussed as well.
Launch
Early plans called for a launch of the index futures contract before the end of 2006, but organizational and operational delays may push the launch into early 2007. But the buzz is building, and skeptics are non-existent. Recognition of the important role of risk management is spreading. Regulators have hinted at liberalization to allow even state-owned enterprises to hedge. A vice minister of the State-Owned Assets Supervision and Administration Commission recently was quoted as saying, in a article reprinted on the Chinese government's official web portal, "It wouldn't be a problem if SOEs conducted hedge trading at the exchange." Most local observers caution that initial volume will be modest, but the underlying feeling is that the eventual proportions of the Chinese stock index futures contract will be anything but.
作者：youhighness 在 海归商务 发贴, 来自【海归网】 http://www.haiguinet.com
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 [转帖]The Dawning of Financial Futures in China -- youhighness - (15212 Byte) 2006-12-21 周四, 00:38 (1055 reads)
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