Chinese Financial Regulator Warming up to Commodity Options

China’s financial markets professionals have been facing an ongoing battle from policy makers as the government keeps a Chinese wall from much-needed reforms to compete with international markets. However, in a turn of events the financial watchdog, China Securities Regulatory Commission (CSRC), has hinted that it will be opening up commodity options trading.

In a notification on the regulator's website, the firm stated that it will be allowing commodity options simulation trading to commence from November 8th. The move comes 12 months after the Dalian Commodity Exchange has been exploring simulation trading in options, a common practice among venues prior to the launch of new products or solutions.

"The futures exchanges have done a lot of research and preparation on options trading and the conditions are now ripe for their launch," the CSRC stated on its online microblog.

"We will work closely with the exchanges and brokerage firms to develop the options market,” it added.

Made in China

In addition to the positive news of options contracts, the exchange reiterated its stance on overseas exchanges setting up shop in the mainland.

Overseas firms looking to take a piece of the cake have been banned from doing business in China. Foreign-based exchanges are not allowed to take advantage of China’s growing capital markets structure, despite the new Shanghai free trade zone taking shape.

Futures But No Options

China welcomed futures over 23 years ago. The first contract was traded in October 1990, under the China Zhengzhou Grain Wholesale Market which was established in Zhengzhou.

China’s spike in economic growth and activity post 1990’s resulted in an influx of commodity derivatives exchanges getting established.

Currently there are four major futures exchanges in China:

• Zhengzhou Commodity Exchange (ZCE, established in 1993)
• Dalian Commodity Exchange (DCE, established in February, 1993)
• Shanghai Futures Exchange(SHFE, established in 1999)
• China Financial Futures Exchange (CFFEX, established in September, 2006)

China’s introduction of options will be the icing on the cake for BRICS offering a full suite of derivatives contracts, out of the five emerging market nations China is the only nation that has been shy from the product.

Options will be a key component in China’s bid to offer complete multi-asset trading solutions to domestic investors, corporates will benefit the most through the use of options to manage exposure with Volatility affecting commodity prices