Index futures to boost commodity trading

Shanghai's role as a leading global financial center has been further consolidated as the city has accelerated its launch of a number of yuan-denominated futures products over the past few years.

Bonded copper futures contracts, which are open to foreign traders, are one of the latest attempts. The new product, which began trading on the Shanghai International Energy Exchange on Nov 19, allows overseas investors to trade via a futures firm member of the INE or an overseas broker. Major overseas trading platforms such as Tradex and Bloomberg also have access to bonded copper futures on the INE.

In one month's time, the number of trading lots for bonded copper futures stood at 401,300, with the total trading amount exceeding 102.3 billion yuan ($15.8 billion). As of Dec 18, the total outstanding position of the product were 17,500 lots, up 736.1 percent compared to the first trading day.

Matthew Chamberlain, London Metal Exchange's chief executive, said that the product has bridged the London and Shanghai markets by taking the bonded area in Shanghai as the venue for physical product delivery. Investors will thus be able to conduct cross-market arbitrage, he said.

Bonded copper futures, also known as international copper futures, is the fourth international futures product launched by the INE. Yuan-denominated crude oil futures unveiled in 2018 was the exchange's first international product, followed by rubber and low-sulfur fuel oil futures.

Jiang Yan, chairman of the Shanghai Futures Exchange－INE's parent institution－said bonded copper futures can directly reflect the international spot market's supply and demand for the metal, elevating China's role as a global pricing center for copper.

In addition to bonded copper futures, more products are in the pipeline. Alumina futures, container freight rate index futures and shipping index futures are scheduled to be launched. Efforts will be made to develop nonferrous metal index futures, rubber futures and options for already-launched futures. More financial tools such as natural gas and refined oil futures, crude oil options and crude oil exchange traded funds will be contemplated, Jiang said.

The long-term goal of the 31-year-old Shanghai Futures Exchange is to grow into a top global trading venue. To serve that goal, the exchange will further optimize its system and risk management tools so that more international investors participate in trading yuan-denominated products, and use or refer to commodities futures prices, he added.

Apart from adjusting current futures products on offer, an over-the-counter market will be set up at a faster pace so that resources can be allocated more efficiently.

But more importantly, the exchange will carry out opening-up unswervingly to enhance China's influence on commodities in the global market, Jiang said.

"Based on instruction from the China Securities Regulatory Commission, we will guide qualified foreign institutional investors and renminbi-qualified foreign institutional investors to take part in the trading of specific commodities futures. Meanwhile, we will promote overseas development by exploring the possibility of increasing registered products and setting up delivery warehouses in markets involved in the Belt and Road Initiative," he said.

Low-sulfur fuel oil futures, which was rolled out in June, will be the first products to participate in an overseas delivery warehouse experiment. The Shanghai Futures Exchange will work with overseas exchanges in terms of authorization of settlement prices and proxies for commodities futures, Jiang added.

The exchange's international development answers the central and municipal government's call for enhancing China's pricing for commodities.

In a speech delivered on Nov 12 at a grand gathering in Shanghai to celebrate the 30th anniversary of the development and opening-up of the Pudong New Area, President Xi Jinping said efforts should be made to enhance the area's influence on the pricing of commodities in order to better serve and lead the development of the real economy.

One of the goals for the municipal government of Shanghai over the next five years is to see products such as yuan-denominated crude oil futures become more influential worldwide, according to the city's 14th Five-Year Plan (2021-25) guidance released at the end of last year.

Crude oil futures, a milestone in China's financial opening-up, has attracted about 280 overseas members in two years' time. Traders, manufacturers and leading funds make up most of the overseas members. It can be said that the influence of the internationalized product has been built indirectly, as our trading rules have been recognized, Jiang said.

"But more efforts can be made to enhance the direct influence of crude oil futures. It is when more investors are referring to our pricing that the global influence of yuan-denominated crude oil futures is truly built," he added.