The Great China gamble for futures exchanges

By Owain Johnson, chief products and services officer at the Dubai Mercantile Exchange

The Chinese market for futures is too largeto ignore. However, opinions differ on how to make the most of the country’sundoubted potential.

No one can deny the scale of theopportunity that China represents for international derivatives. The onshoreChinese exchanges post huge volume numbers month after month while thepotential scale of outbound business, once the domestic market opens up, willbe a genuine global game changer.

The ‘believers’ argue that any seriousfutures player should be engaging with China and preparing for the onshore marketto open-up. In contrast, the ‘sceptics’ argue that engagement is time-consuming,expensive and will be ultimately pointless if China’s eventual opening isone-way traffic only.  

We are firmly in the camp of thebelievers.  Last year the DubaiMercantile Exchange (DME) signed an initial agreement with the InternationalEnergy Exchange (INE) in Shanghai to work together on developing energy marketderivatives.  We have seen how theunparalleled rise of China as a demand and trading centre for commodities hasled to a tremendous surge of interest in risk management; we know how vital itis for our business to be present at the birth of Chinese energy derivatives andto position ourselves as a valued overseas partner.

But not everyone is prepared to wait forChina to open up its markets to international access. In December, ICE said itwould make the highly significant move of launching Chinese futures contractson its new Singapore exchange.  Traditionallyit has been impossible for non-Chinese traders to access onshore contracts, butICE’s new exchange plans to offer an alternative to onshore Chinese futurescontracts but priced in US dollars.

The new ICE cotton and sugar futurescontracts will be based on futures traded on the Zhengzhou Commodity Exchange(ZCE).  This is the first time that anyexchange outside China has tried to make use of an established onshore Chinesefutures contract.

Not surprisingly, other exchanges arewatching closely to see what happens next. The success or failure of these lookalike Chinese contracts will tellthe industry how much appetite there is outside China for dollar-denominatedversions of the giant onshore contracts. In theory, demand should be good: Chinese futures contracts are some ofthe largest in the world but are currently barred to entities without anoffshore presence.

What is most intriguing though, is thescale of reaction that will come from the ZCE and Chinese authorities. Theircombined response will tell the broader industry whether China as a whole isprepared to fight in order to protect their intellectual property from replicationby foreign exchanges.  The next fewmonths, therefore, will tell the markets a lot about whether China will open upon its own terms or whether foreign exchanges will anticipate that opening andlook to force the pace.