Cffex readying raft of new products

Shanghai’s China Financial Futures Exchange (Cffex) plans to list new derivatives products more frequently, as it readies the mainland’s first index options and more bond futures, and looks at developing a volatility index.

Index futures will be the initial focus, with futures and options based on the SSE 50 and CSI 500 indexes planned “in the near term”, said Daniel Li, deputy director of Cffex’s treasury futures development team, at the FOW Derivatives World Asia Conference in Hong Kong yesterday.

Moreover, the bourse will soon launch three- and 10-year bond futures, or even shorter tenors similar to those of Eurodollar short-term rate futures, says Li. These will add to the five-year government bond futures already available.

Options on government bonds are also in the pipeline, Li added, but he did not give a time frame.

All this will be welcome news for market participants, who waited more than three years for the launch of China’s first – and still its only – financial futures contract, on the CSI 300, in April 2010 after months of mock trading.

Mock trading of SSE 50 index futures and CSI 500 index futures started on March 21, to familiarise market participants with the contract specifications and various aspects of pre- and post-trade procedures and execution.

In the longer term, Cffex is looking at developing its own volatility index and products, similar to those based on the Chicago Board Options Exchange’s Vix index.

As for the challenges Cffex faces, Li said the bourse needs to diversify its client base. While daily trading volume of CSI 300 futures sometimes reaches 1 million lots, as much as 90% is accounted for by retail investors.

“We need to attract more institutional investors – such as international banks, which have very a different capital cost structure and risk management culture from their Chinese counterparts – to trade bond futures,” says Li.

Another issue is that the turnover ratio – the level of hedging or speculation activity on a contract – of government bond futures is also low, at less than 100%, while the turnover ratio of CSI 300 futures can reach 10 times.

Financial market reform in China has reached a critical point, said Li, as evidenced by the new Shanghai free trade zone (FTZ), which is expected to attract more foreign investors and commodity traders to the Chinese market.

The FTZ is a testing ground to expedite mainland financial market reform – including liberalisation of interest rates, the capital account and the renminbi. All these reforms should provide opportunities for Cffex to grow into a leading derivatives exchange in China, said Li.