FMCs focus on China's evolving derivatives market

Chinese fund management firms are increasingly turning to the country’s rapidly evolving derivatives market in a concerted effort to offer more innovative financial products.

E Fund Management is busy preparing commodity index products, for example, while a number of other asset managers recently started trading index futures.

E Fund is poised to provide exposure to commodity markets for segregated account clients through products that track nine commodity futures composite spot indices, launched by China Securities Index (CSI) last December. These cover agriculture, metals, chemical products, energy and textiles.

Inflation fears combined with soaring prices of certain commodities have made the asset class a popular bet with investors of late.

“Private banking clients and institutional investors such as insurance companies and proprietary trading desks of securities companies have all expressed interests in commodity products,” confirms Liu Zhen, managing director of index and quantitative strategies for E Fund.

The firm’s initiative comes amid deregulation efforts by Chinese authorities. Last November, the China Securities Regulatory Commission (CSRC) published a draft proposal on the management of segregated account assets, opening the door for FMCs to invest in commodity futures.

“This is a regulatory breakthrough as this will be the first time in China that institutional investors will have official access to the commodity futures market through FMCs’ segregated accounts,” notes Liu. 

However, the launch of E Fund’s commodity product depends on the CSRC pushing this regulatory update through. “The proposal has not yet been approved and detailed guidance of FMCs’ participation in commodity futures trading has not yet been released,” adds Liu.

Bosera, a Shenzhen-based fund management company, announced yesterday that it had started index futures trading for segregated accounts with alpha-return and arbitrage strategies.

Bosera’s alternative investments team, established in 2008, aims to achieve absolute return by capturing market mispricing through the use of index futures, margin trading and securities lending.

Further, China Merchants Fund has also started trading stock index futures. Tony Liu, deputy director of product department, says the firm will consider including commodity futures as an asset class once it is satisfied its middle- and back-office have been sufficiently tested.

China’s derivatives market is evidently developing rapidly both in size and variety of products. The transaction value of China’s futures markets stood at Rmb10.6 trillion this January, a 23.9% year-on-year rise, with commodities accounting for Rmb6.6 trillion and stock index futures Rmb4 trillion, according to the China Futures Association.

Last Friday, the CSRC approved lead futures as a new product on the Shanghai Futures Exchange. The bourse has completed the preliminary design of lead-futures contracts and drawn up rules on transactions, settlements and delivery.

With three commodity exchanges operating in Shanghai, Dalian and Zhenzhou, China has developed the world’s largest commodity markets. The China Financial Futures Exchanges also introduced stock index futures last April.