SHANGHAI – China’s three commodities exchanges, led by the Shanghai Futures Exchange, are vying to introduce options in the next two years to capture more trading.
Shanghai copper futures, which account for nearly 40 percent of all futures trade in China, are the likely first candidate for an options contract, which gives a purchaser the right — but not the obligation — to buy or sell the underlying security at a certain price during a specified time.
It may take a while, but exchange officials expect at least one contract would be available by 2007. Chinese officials recently have been taking study trips to Chicago, the home of options and futures trading.
“There’s a market need for options to manage risk,” said an official of the Shanghai exchange, China’s premier futures market with copper, aluminium, rubber and fuel oil contracts.
Copper futures account for more than four-fifths of trade on the exchange, with an average notional value of around $1.2 billion a day in the first four months of 2005. Turnover totalled about 65,000 contracts a day, about a sixth of daily copper turnover by tonnage on the London Metal Exchange.
“The copper option could succeed, but only because it’s another opportunity to trade, or in other words gamble,” said a trader with a foreign bank that does not trade on the Shanghai exchange.
Copper options on the LME, the world’s benchmark for trading base metals, have fluctuated this year between 1 percent and 24 percent of the total volume of copper futures.
The Dalian Commodity Exchange is looking to launch options on soybean futures while the third futures exchange, the Zhengzhou Commodity Exchange, is eying wheat futures options.
“Chinese commodities markets are still in the early stage,” said a Dalian Commodity Exchange official who declined to be named. “The regulators aren’t really in a hurry. They are still worried about cleaning up China’s financial industry.
The Shanghai Futures Exchange and the Chicago Board of Trade signed a cooperation pact last week, one of many that involves Chinese exchange officials going abroad to study market mechanics and expertise.
Both the Chicago Board of Trade and Chicago Board Options Exchange offer Web sites in Chinese, attesting to China’s growing ties with Chicago, also the world’s grains trading centre.
China’s largest soybean importers hedge on the CBOT, and all three of its exchanges have signed memoranda of understanding with the CBOE, where options volumes in April hit a record of 40.7 million contracts. The CBOE mainly offers equity and index options, but it got approval for a futures market in 2003.
Each exchange has a line-up of futures products — including steel futures in Dalian and Shanghai — that have yet to be approved by Beijing. The Zhengzhou Commodity Exchange has received most of the approvals for a white sugar contract, but still cannot say when it will be launched.
In China, the government sets policy for all three futures exchanges to prevent the chaotic speculation that led to the consolidation of more than 50 exchanges into 15 in 1994. Those exchanges were merged into the current three in 1998.
Dalian’s options candidate would be a soybean futures options contract, said the exchange’s marketing director, Wang Weiyun.
Its flagship futures contract is the Number One soy contract. Number Two soy is designed for imported soybeans, and soymeal is gaining popularity as a hedging tool for crushers.
Zhengzhou is championing a wheat futures option, according to an exchange official. It currently offers two wheat futures contracts: strong gluten and hard white winter wheat.
Source: Muzi News