Futures Daily：Upgrading of Derivatives Serving the Real Economy

Date: March 7, 2017

Contributed by Zhang Tianmiao, journalist from Futures Daily 　　

In the past few years, along with the gradual changes in investor mix in domestic futures market and continous innovation in exchange’s products, the futures market ushered in a new stage. “ As for domestic enterprises, a better use of derivatives tool in current environment is of great help to an enterprise’s scaled operation. ”said Ma Wensheng, president of Xinhu Futures, in an enterprise-oriented specialized hedging training held by the Shanghai Futures Exchange in Shanghai between March 1^st  and March 2^nd . Currently focus shall be put on the study on how can an enterprise make better use of derivatives tools and how can Futures Firm’s innovative business better integrate with enterprises.        
　

As a matter of fact, the listing of relevant futures products will, to a great extent, change the way enterprises operate their businesses and the environment in which enterprises develop their businesses. Zhang Yisheng, a non-membership member of China Futures Association, said that the industry chains and mix of enterprises related to the listed futures products have undergone a great change following a long period of price orientation and erosion cuased by emerging competition model.            

He explained that following the listing of relevant futures products, the transmission rate of price related information have picked up speed and its penetrability has become stronger, hence resulting in a higher frequency of price fluctuation, a relatively larger volatility and a narrowed price fluctuation cycle. The industry competition model has transformed itself from one-on-one competition characterized by visible competitior and dealing in spot goods, into the invisible one-on-multiple competition characterized by hedging in the market, which not only bring enterprises multiple marginal opportunities, but is also a test on physical enterprises’s adapabilities and resilience.                

“ The deployment of futures is a representation of enterprises’ business management level and risk management capability.” said Zhang Jianhui, manager of Futures Management Department of Yunnan Copper Co., Ltd., “ Now futures tools have been increasingly and widely used by enterprises for their business management. Most of enterprises increasingly relied on furtures market as a hedging means, pricing method or even a risk referrence.”  In his opinion, in the past, futures was an enterprise’s hedging tool, but now a referrence used by an enterprise for the pricing of raw materials and products on its upstream and downstream. Apart from serving as a means of realizing the buy-sell balance and risk alignment by filling up the dificiency on either side of a current trade, futures is also a reference used by an enterprise for its risk mangement.      

Futures Daliy’s journalist noticed that as for non-ferrous metals industry, the pricing of both onstream and downstream raw materials and products reflected the coorelationship between operation and futures. According to Zhang Jianhui, currently in the field of domestic production, processing and trade of non-ferrous metals and precious metals, almost all enterprises determined the settlement price of raw materials purchase and product sales using the method of pricing ( quotation price or daily settlement) and average price.          

According to Ma Wensheng, nowadays, some enterprises, far from merely utilizing futures market to conduct hedging at market prices, have already begun to pursue the transmformation of one business philosophy and business model to another. Among top 500 global enterprises related to global markets, there are 471 enterprises holding open positions in derivatives markets. In China, there is still a great potential for self-development of futures market and service industry, given the types of derivatives or the extent to which enteprises participate in the derivatives market. 

Moreover, in light of international experiences, along with the development of futures, option and swap market, scale of OTC market based on floor maket will gradually grow as well. “ The reason for such a change is an enterprise’s demand-orientation.” explained Ma Wensheng, “ Compared with those simple and standardized products, product with a more complicated structure is even closer to unique demands from deferent enteprises. As derivatives tools in China’s floor market have become increasingly complete and the foundation for normalized markets increasingly solid, domestic enterprises’ demand for “ one-on-one” product will become more and more stronger. In the next few years, “one-on-one” products developed by futures firms or futures risk mangement firms are also expected to reach a certain scale. By then, liquidity in OTC markets is also expected to be improved greatly.