Derivatives exchange of the year: China Financial Futures Exchange

Asia Risk Awards 2023

China Financial Futures Exchange

As financial regulators in mainland China have sought to encourage greater foreign institutional participation in the country’s investment markets, China Financial Futures Exchange (CFFEX) is on hand to support the opening up process.

“In recent years, various types of professional institutions such as mutual funds, insurance companies, pension funds and annuities have entered our market, accounting for an increasingly large proportion of trading volume and open interest. We continue to seek to support institutional investors by making access easier,” says Hu Xiaolong, head of CFFEX’s institutional service department.

This has involved working closely with regulators on new policy initiatives to promote greater market participation, running regular professional training courses for participants and continuously engaging with clients to help them address any challenges they are facing. CFFEX has also launched a series of products over the past 12 months and is seeking to improve existing ones in line with investor demands.

The head of trading at one onshore futures company says: “CFFEX has continued to enrich product supply, optimise open interest structures and trading fees and promote the entry of domestic and overseas medium- and long-term funds into the market. [This has given] full play to the functioning of the financial futures market and enhanced the operation of the financial futures market.”

Over the past 12 months, CFFEX has seen slightly more than a 12% increase in the institutional client number and a 35.49% increase in institutional participation in terms of trading volume across all products. Xiaolong admits this is a slightly slower rate than the more hedonistic days prior to Covid-19, but it is still significant given the slower-than-expected recovery in the Chinese economy. She says institutional participation is now around 69% of equity index futures, and for government bond futures it’s around 90%.

Product launches

One of the most important products that CFFEX brought to market during the awards judging period was equity index futures and options linked to the CSI 1000.

The CSI 1000 consists of 1,000 small and liquid stocks that are traded on the Shanghai Stock Exchange and the Shenzhen Stock Exchanges. This is distinct from the popular CSI 300 index, which replicates the performance of the top 300 stocks traded on these exchanges.

“This is a milestone as our equity index product offerings now cover the large, medium and small cap listed companies in China,” says Xiaolong. “The products have been welcomed by the investor community since their launch, fuelling innovative product development and investment strategies linked to the underlying and satisfying the demands of index investment.”

The CSI 1000 futures and options product was launched on July 22, 2022. Since then, trading volume has grown steadily. Average daily trading volume of CSI 1000 index futures is around 54,000 lots, while for options this is around 61,000 lots. Average daily open interest is around 120,000 hands and 64,000 hands respectively. By contrast, average daily trading volume on the popular CSI 300 futures is 95,000 lots and for options it is 105,000 lots.

The launch of the CSI 1000 is important for another reason. It represents the first time that CFFEX has launched options and futures on an index at the same time.

“Our goal is to offer both futures and options products on the same underlying to create a comprehensive risk management toolkit,” says Xiaolong. “Years of robust growth has given investors more confidence in derivatives instruments and this has offered us the opportunity to introduce more products onto the market.”

Speaking in appreciation of the CSI 1000 launch, one client from a Chinese futures company said: “The listing of these futures and options further improves the overall financial futures and options ecosystem…. it also caters to the market’s needs for a more diversified risk management toolkit and better serves the high-quality development of the real economy.”

CFFEX has also further expanded its equity index derivatives product suite with two other launches this year.

One is options trading linked to the SSE 50, to accompany the SSE 50 futures that CFFEX already offers. The SSE 50 represents the top 50 companies, by market capitalisation, traded on the Shanghai Stock Exchange.

The other new product is 30-year futures on Chinese government bonds (CGBs). This was something insurance companies and pension funds had been clamoring for. With the launch of this latest product, CFFEX now offers the entire gamut of CGB products: two-year, five-year, 10-year and now 30-year products.

Currently, only local firms or branches of foreign firms – including local insurance companies, pension funds and banks – can trade CGB futures in China.

Average daily trading volume for 30-year futures is around 10,000 lots. Xiaolong says that this is “not bad – but also not quite where we want to be”. She adds that, as liquidity improves in the market, the daily volume should increase.

“We strive to construct a product suite that covers a wide range of underlying assets, provide risk-management services with precision, and better support the national strategies and the real economy,” says Xiaolong.

There remain some small gaps in CFFEX’s product offering – such as an absence of options on the CSI 500 index – but such additions are already in the pipeline.

All these new product launches are underpinned with a state-of-the-art technology platform that CFFEX is constantly improving.

Last year, CFFEX launched a new, cost-efficient and heterogeneous emergency system to make the whole trading and clearing platform more resilient and stable. The exchange has also recently developed a distributed database, which Xiaolong says will make the market surveillance process much smoother.

“This is all about improving business continuity and emergency management to ensure a stable financial futures market,” Xiaolong says.

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