Since our last examination of the Asian futures exchanges in April, virtually every planned or projected upgrade has been implemented. Whether it’s new technology in Japan or relaxed restrictions on access in Taiwan, Asia is an easier place to trade than ever before.
Unfortunately, that’s not saying it’s as easy to trade Asia as it is to trade Germany. The two largest markets, China and India, remain essentially off-limits. The only way to get a piece of that action is through mirror products in Singapore and elsewhere.
“Opening up is a slow process, says Fred Grede, who runs Vega Financial Engineering, an Asian focused consultant. “In every country you have concerns about the ability of smaller local players to compete, and there is lingering concern about foreign capital from the late 1990s,” he says, adding that even with limited foreign access, Asian exchanges are booming.
“We just helped set up the Thailand Futures Exchange (TFEX) in Bangkok,” he says. “They launched the SET 50 Stock Index futures in April, and volumes are now averaging between 1500 and 2000 a day, with options trading set for the middle of next year.” Thailand now has two exchanges – the TFEX and the government-funded Agricultural Futures Exchange of Thailand, for which Patsystems provided the technology.
“We’re seeing more business coming out of Asia as exchanges there wire themselves into the global network,” says Patsystems boss David Webber.
Indeed, from Karachi to Tehran to Jakarta, modern futures exchanges are coming online at a dizzying pace. “These new exchanges will be up to speed incredibly quickly,” says Lamon Rutton, who used to be in charge of commodities trade for the United Nations Convention on Trade and Development. Last year, he quit that position to take a job with Mumbai’s Multi-Commodity Exchange of India (MCX).
“It will be a while before you start to see consolidation in Asia, although the exchanges are already talking about it,” says Grede. “There are several barriers. To begin with, none of them are completely public and many have 5% holding restrictions, so they are looking for ways to position themselves, and everyone is talking to everyone.”
While some believe the region will produce a flurry of new products, Grede says we’ll see a proliferation of new derivatives on existing products. “A lot of these markets don’t even allow options trading yet,” he says. “That’s changing and that’s where the real growth is going to come from — options and option-like products such as warrants (options backed by their issuers).”
CHINA: FINANCIALS DEBUT
Earlier this year, Air China announced that 69% of its “profits” came from a hedge on jet fuel. That’s good news for the airline and for the nation’s futures exchanges but it hasn’t led to greater hedging, as the markets continue to be driven by speculative excess.
The China Securities Regulatory Commission (CSRC) hopes that bringing more institutions into the trade will help cool that fever. Next year, the CSRC will finally allow the launch of the much anticipated China Financial Futures Exchange (CFFEX), and authorized state-owned enterprises (SOEs) will be able to hedge there. The launch was announced one year after CSRC boss Shang Fulin told a Shanghai conference sponsored by the Chicago Mercantile Exchange (CME) that the Chinese government wanted to make equity index and fixed-income futures available as hedging vehicles. The exchange is now running mock trading on its debut product: futures on the Shanghai and Shenzhen 300 Index, which is comprised of the 300 largest companies on both exchanges.
Not surprisingly, scores of rules have been implemented to keep the market on an even keel, and it’s a good bet they will keep it from catching on globally even if it can be accessed. The daily price limit is 10% of underlying value, but trading will be bound into a tight range for 10 minutes if the market moves 6% before letting it free, and trading will halt for 10 minutes when volatility hits 6%. There is also a tight position limit of 2,000 contracts.
The CSRC allows Hong Kong-based non-Chinese companies meeting financial stability requirements to form joint ventures with Chinese companies to launch brokerages in the country, and ABN Amro was the first to get there by taking a 40% stake in a joint venture futures brokerage with China’s largest brokerage in terms of offices. That venture came through in May, and is now part of UBS, which has since purchased ABN’s futures business. But it’s focused on attracting Chinese business for trading outside the country.
For all intents and purposes, China remains off-limits to U.S.-based traders.
INDIA: OPENING SLOWLY
Although options are not yet legalized in India, it is perhaps the most exciting nation for derivatives traders, with more than 100 individual commodity contracts, the most dominant until recently, being guar seeds, chana, silver, gold, and the urad, a type of lentil. But that changed in October, when the National Commodity Exchange of India announced the natural gas futures contract it launched in July had become the world’s second-largest in volume behind the New York Mercantile Exchange’s contract. That mirrors the success the National Stock Exchange (NSE) achieved a few years back when it became the world’s largest platform for single stock futures.
Regulators are slowly opening the markets to foreigners, mindful of a lingering bias against futures, which flared earlier this year after wheat prices spiked and leftist politicians called for banning the markets completely. Futures on NSE’s S&P CNX Nifty Index contract can be traded from the United States, but only by people or companies that either open an Indian branch office in a joint venture with an Indian company, or by becoming Foreign Institutional Investors (FIIs), a status that enables them to trade equities through a local broker. The Forward Markets Commission (FMC), which regulates futures, has cleared the way for FIIs to trade commodities, but the central bank and legislature have been reluctant to sign off on that.
“If we could access the commodities markets, then becoming an FII might be worthwhile,” says Nathan Corson, a trader with proprietary trading house The League Corporation. “We went over there in October, for the FIA Asia conference, and it was pretty impressive.”
Like China, India does allow trade in so-called participatory notes, a sort of option on shares bought and sold outside the country, but the real excitement is focusing on commodities and the two major commodity exchanges: MCX and the National Commodity and Derivatives Exchange (NCDEX).
MCX has been far more aggressive. It runs a Windows-based trade-matching engine built by Financial Technologies (India) Ltd., which owns a stake in the exchange and it has taken a free-wheeling approach to growth launching numerous commodity products. It’s also an equity partner in the Dubai Gold and Commodities Exchange (DGCE) and the not-yet-launched Pan-African Commodities and Derivatives Exchange (Pacdex). Fidelity International owns 9% of MCX, while Goldman Sachs has 7% of NCDEX, and Merrill Lynch has opened a joint venture to market investments to Indians. India looks well on the way to becoming a major global derivatives player.
KOREA: THE LITTLE GIANT
Another market tantalizingly out of reach of U.S. traders is Korea’s Kospi 200 Index options; the world’s most deep and liquid contract in volume. The Securities and Exchange Commission (SEC) has approved the exchange’s products in the United States, but the South Korean government has not yet taken the final steps to make products available to U.S. traders.
There are two reasons for the hold-up: the Korean Exchange is still working out its initial public offering, which has been penciled in for April 2007; and the implementation of the Capital Market Consolidation Act is still underway. That act, designed to enable Korean firms to compete on the world stage also will make it possible for Korean banks to participate in a more diverse range of financial instruments. The industry is retooling and some fear an influx of foreign capital and competition will steamroll smaller, less sophisticated Korean banks.
Despite the delays, exchange boss Lee Young Tak has made it clear he plans to take ownership stakes in compatible exchanges, such as the Stock Exchange of Thailand and the SGX.