Caixin
Jun 01, 2021 06:07 PM
FINANCE

China to Launch First Options Open to Foreign Investors

A 320,000 ton oil tanker docks at a crude oil terminal in Zhoushan, East China’s Zhejiang province, on April 10. Photo: VCG
A 320,000 ton oil tanker docks at a crude oil terminal in Zhoushan, East China’s Zhejiang province, on April 10. Photo: VCG

China is set to launch its first batch of yuan-denominated options open to trading by overseas investors, as the country accelerates the domestic derivatives market’s opening-up to meet foreign investors’ demand for hedging tools.

The China Securities Regulatory Commission (CSRC) has approved trading of crude oil options on the Shanghai International Energy Exchange (INE), and palm oil options on the Dalian Commodity Exchange (DCE), the securities regulator announced (link in Chinese) on Friday. Both products will be open to overseas investors, with palm oil options set to begin trading on June 18 and crude oil options to follow on June 21, according to the announcement.

Opening these products to overseas investors can help meet their risk management needs, the CSRC said.

Overseas investors on Chinese mainland financial markets have long complained about insufficient access to hedging and derivatives instruments that would allow them to bet both ways on the direction of stocks, bonds and commodities so they can better manage their risks. In response, China pledged to develop the derivatives market and give overseas investors greater access. In September, the government announced it would expand the derivatives market by letting foreigners use financial futures, commodity futures and options.

A derivative is a contract with a value that is based on fluctuations in an underlying asset, such as stocks, bonds, agricultural and industrial commodities, currencies, interest rates and their corresponding indexes. Common derivatives include futures contracts, forwards, options and swaps. While a futures contract gives an investor the obligation to buy or sell the underlying asset at a predetermined price at a predetermined time, an options contract gives an investor the right but no obligation.

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In Depth: China Speeds Up Expansion of Derivatives Market

Crude oil and palm oil are important commodities. Their futures markets have been running smoothly since the listing of relevant contracts, and there has been extensive participation of industrial customers, the CSRC announcement said.

China’s first yuan-denominated crude oil futures contract made its debut on the INE in March 2018. It was the first domestic commodity futures product open to overseas investors.

Demand for crude oil options was fueled by dramatic fluctuations in global oil prices last year, said an INE statement on Friday.

Palm oil futures made their debut on the DCE in 2007, and were accessible to overseas traders last December. The listing of palm oil options can better meet the hedging needs of domestic and overseas palm oil producers, processors and traders, industry insiders said.

The simulated trading of crude oil options took place (link in Chinese) from May 10 to May 21, while the DCE launched (link in Chinese) the simulated trading of palm oil options on Tuesday.

Currently, China’s lawmakers are deliberating on the country’s first law specifically for the domestic derivatives market. Although it’s called the Futures Law, a draft recently made available for public comment covers a broader range of derivatives, including options.

Contact reporter Luo Meihan (meihanluo@caixin.com) and editor Joshua Dummer (joshuadummer@caixin.com)

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