Futures Daily: Shanghai Futures Exchange: Promote Futures and Spot Combination, and Meet the Diversified Demands of Entity Enterprises

Updated on: 2016-12-08

Reported by Xu Qian, Journalist from Futures Daily

In the SHFE Special Forum on “Innovative Development Service Real Economy” of 12^th (Shenzhen) International Futures Conference, Bao Jianping, the Director of SHFE Bulk Commodity Service Department expressed that, to promote the futures and spot combination, better provide services for real economy, and meet the diversified demands of real economy, SHFE planned to release bulk commodity trading platform as soon as possible, to provide services for the spot and OTC derivatives related to futures, such as the warrant transaction, spot contract, forward, changeover, and price difference transaction, and meanwhile, gradually expand the standard intra-field business towards the non-standard OTC business.

The market demand is urgent, and the futures market shall take root in the spot market and expand the market

Bao Jianping said that “The development of futures market is like a tree, and the futures are built on the basis of spots, of which the spots are roots, the futures are tree trunks, and the derivatives are leaves. As can be seen from the development of futures, the relatively urgent issue at present is how to break through the last kilometer of futures and spots, realize the connectivity of futures and spots, intra-field and OTC, and the domestic and overseas regions, and meanwhile, truly build a multi-layer commodity market system, and this is the most important discussion topics for us at present.” Starting from the future development of the SHFE, on one hand, it is requested to take root and expand towards spot market, and on the other hand, it is requested to develop more derivatives.

He thinks that, to help the updating of Chinese economics, and the development of the Belt and Road strategic objective, the domestic futures exchange shall use new concept and new technology and innovative means to build a new market organization system. Therefore, the futures exchange needs to build a bulk commodity trading platform that can combine futures and spots as well as the intra-field and OTC, and meanwhile, use the current internet technologies and the technologies of the Internet of Things, to combine the e-business, modern logistics, and big data, cloud calculation, etc., expand the space of futures market serving the spot market, further promote the exertion of market functions, and serve the supply-side reform.

Being different from the development route of foreign futures exchanges from spots transactions, the futures market in our country is relatively simple in the trading mode, while the transaction of foreign futures exchange is diversified, and what they provide is diversified products and comprehensive service. Currently, the demand conflicts between domestic futures market and spot market are relatively prominent, and the standardization products and standardization transactions of futures market cannot cope with the diversified demands and dispersive transaction characteristics of spot market.

Bao Jianping expresses that the particular difference between two markets are embodied in five aspects: The first difference is the location, the location of futures trading delivery is relatively centralized, and the distribution of entire industry is relatively decentralized; The second difference is the time, there is the contradiction between the demands of futures and spots; The third is the contradiction existed between standardization of specifications and diversification of demands; The fourth is the certain deference between listed futures products and products of enterprise required to conduct risk hedging; The fifth is the deference in trading mode, now the matched trading mode is adopted by futures, and there is difference with OTC diversified trading modes.

It is known that SHFE finds that the investors have the active demand for combination of futures and spots during the market survey process, including the futures companies and risk management companies also encounter a series of problems in the innovation process, in order to achieve the effective docking of futures and spots, establish the bulk commodity trading platform of SHFE, which has necessity and feasibility at the same time.

For promoting the docking of futures and spots, the leading role of the futures exchange should be played

The journalist of Futures Daily acquires that the market circulation order of bulk commodity is not standardized, cultural and integrity mechanism is not fully established, resulting in trading difficulty in spots and OTC derivatives, risks may occur at any time. A series of events reveal the problems of integrity lacking, false trading, repeated pledge financing existed in circulation of bulk commodity in China, such as East China Steel Trading Companies Event in 2012, Qingdao Port Event in 2014, FYME Metal Exchange Event in 2015.

Bao Jianping said, “in respect of OTC derivative market, due to the lack of effective administration, the bulk commodity market is bankrupt and other risk event may occur at any time, insufficient derivatives may make the market to be unable to meet the diversified demands of enterprise risk management.” Proceed from the relatively mature futures market, extended along industry chain of commodity upwards and downwards, open up the contact between futures and spots, intra-field and OTC, domestic and overseas market, construction of bulk commodity and derivatives market is an efficient method.

For the advantage of futures exchange to construct bulk commodity and spots platform, there are five advantages analyzed by him:

Firstly, the futures exchange is the national exchange approved by regulators of the State Council and under the unified supervision of China Securities Regulatory Commission (CSRC); it can effectively solve the problem of legality and effective supervision of the bulk commodity market.

Secondly, the futures exchange has a complete set of rigorous rule system and technology system assurance and professional operation experiences, which can guarantee the trading delivery to be open, fair, impartial and efficient, meanwhile the clearing system of central counterparty ensures the integrity of market, mature delivery warehouses management, electronic warrant management and clearing system can ensure the safety and efficiency of bulk commodity underlying asset, funds and circulation of bills.

Thirdly, futures trading brings about abundant business flow, material flow, capital flow and information flow, which creates advantaged conditions for bulk commodity trading platform, plentiful bulk commodity warrant resources and abundant spots production, circulation and consumer and all kinds of financing institutions, which makes the flow-ability to be guaranteed.

Fourthly, combination business of futures and spots currently carried out by futures companies and risk management companies encounters the bottlenecks in warrant transaction, pricing service, unified clearing, derivatives pricing and other aspects, they urgently need the bulk commodity trading platform to be established by the futures exchange to achieve the effective docking of futures and spots, solve the problems encountered during innovation.

Fifthly, the futures exchange approved and supervised by CSRC is in the high-end of economic and financial industry chain, with strong social credibility, beneficial to integrate the resources of upper, middle and lower streams in bulk commodity industry chain, formulates the industry rule and standards to give play the role of futures market nurturing spot market in return.

For the three-stage development, the first is to open up the warrant transaction and break down swap barriers

Regarding to the development plan of bulk commodity trading platform of SHFE, Bao Jianping makes the presentation that the urgently required to be solved in the first stage is the warrant transaction and warrants swap. The current warrant implements the distribution system, but there is difference in distribution outcomes between brand and region, therefore there is the demand for warrant swap. The warrant swap transaction on one hand can promote the effective and reasonable allocation and distributions of warrant resources, and can be beneficial to form reasonable premiums and discounts quotation of warrants on other hand, meet the personalized delivery demands, and also be beneficial to promote the reasonable layout and setting of delivery warehouse.

The second stage is to launch the OTC derivative trading of spot at sight and forward based on trading of warrants, forming the regional pricing mechanisms to meet the pricing demand of substantial economy.

The third stage is to launch the other derivatives trading of at forward, swap and option, finally forming an efficient one-stop service platform with combination of futures and spot that can provide the trading of warrants and other derivatives.

For the specific process of business mode, Bao Jianping expresses that the bulk commodity trading platform of SHFE has the supporting services in eight aspects, such as account opening, trading, clearing, delivery, information, risk control, financing and logistics, making use of the open-type bulk commodity trading platform developed by internet technology, to provide the one-stop service for bulk commodity spot and derivatives based on mature futures trading, clearing, risk management and warrants management system. Introduction of commercial bank and other financing institutions can provide quick and convenient financing operations, cooperation with warehouse logistics enterprise can provide standardized, intelligent and efficient warehouse logistics service, introduction of big traders, futures risk subsidiaries can provide marketing service, carrying out data and service cooperation with standardized bulk commodity platform can meet the diversified demands of different enterprise.