Multi-level Commodity Markets in Transition · 2014. 7. 4. · 4 The Current Status of Multi-level...

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Multi-level Commodity Markets in Transition

Huang Yuncheng

May 29th, 2014

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Main Contents

The Current Status of Multi-level Commodity Markets

Changes and Trends in the Exchange Markets

Reflections on the Development of Off-exchange Markets

Thoughts on the Reform of Multi-level Commodity Markets

3


Multi-level Commodity Markets

Commodity

Spot Markets

Wholesale

Markets

Retail

Markets

E-commerce

Currently regulated by the

Ministry of Commerce

Commodity Derivative Markets

Off-exchange

Markets

Commodity

Forwards Commodity

Options

Commodity

Swaps

Market Gap

On-exchange

Markets

Local Bulk

Commodity

Exchanges

Commodity

On-

exchange

Futures

SHFE

CZCE

DCE

Regulated by

Local

Governments

and Ministry-

level Joint

Conferences

Market Gap

Currently Regulated

by CSRC

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The Current Status of Multi-level Commodity Markets (Continued) – Existing Problems

Main Problems in Futures

Markets

Limited varieties of listed

commodities with narrow coverage

Imperfect market functions

Low participation of corporate entities

Stagnant Futures-Spot Interaction

Immature price discovery mechanism

Obscure information transfer mechanism

High transaction costs

High storage and logistic costs

Lack of hedging instruments in the real economy

Lack of comprehensive supporting financial services

Monotonous transaction mode

Lack of uniform commodity quality standards

Main Problems in Spot Markets

Regional barriers ad segregation

Unclear regulatory regimes

Quasi-futures trading at a handful of

agencies

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Independent Central

Clearing Platform

Inter-trader Market

Non-clearing OTC Markets

Spot Markets

Overall Conception of the Multi-level Commodity Market System of China

Exchange

Markets

Off-

exchange

Markets

Central

Counterparty

Trader-to-Trader

Trader-to-Client

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Market Level Market Organizers Market Participants

Exchange Markets Futures Exchanges Various Investors

Off-

exchange

Markets

Independent

Central

Clearing

Platform

Clearing Platforms Various Institutional

Investors

Inter-agency

Markets Futures Companies and Other Financial Institutions

Non-clearing

OTC

Markets

Futures Companies (Risk Management Subsidiaries),

Traders, Industrial Clients

Spot Markets Regional Trading Platform Industrial Clients

Organizer and Participants at Various Market Levels

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Main Contents


• Cross-licenses Among Futures Companies

• Reform of Futures Products Launch Mechanism

• Market-oriented Development of Exchanges




8

Changes in Regulatory Approaches Reflected in Adjustment of

Regulatory Bodies

Funds Department

Futures Department

Institutions Department Security, Funds

and Institutions Regulation Department

Division 1

License and Entry

Approval for Various Institutions

and Businesses

Division 2

Approval of Funds Products,

Policy Coordinati

on for Asset

Management Products

Division 3

Operation Planning and Coordinatio

n for Regulations

and Regulatory Policy, On-

site Inspection

Division 4

Day-to-day Regulation of Security Companies

and Businesses

Division 5

Day-to-day Regulation of Funds

Companies and

Businesses

Division 6

Day-to-day Regulation of Futures Companies

and Businesses

Division 7

Operation Regulation

for Underwritin

g and Sponsorship, Investment Compliance

and Risk Control

Division 8

Service Agency and Consultanc

y and Advisory

Operations, Industry

Information Technology

Division 9

Open-up and Cross-border

Business Cooperation

Regulatory Functions of Various Divisions under Security, Funds and Institutions Regulation Department

(1) Established the concept of ―Great

Institution‖

(2) Explored Functional Regulation

(3) Implemented License

Management

(4) Possible further integration of

laws and regulations

(5) Integration of Back-ends and

Basic Businesses

(6) Expanded open-up

9

Great Institution Cycle

Traditional Conference-regulated

Bodies

Internet Enterprises Traditional Non-

conference-regulated Financial Institutions

10

Business Licenses of Traditional Conference-regulated Bodies

Security

• Brokerage • Underwriting and

Sponsorship • Proprietary Trading • Asset Management • Investment Consultancy • Securities Margin

Trading

Futures

• Commodity Futures • Financial Futures • Brokerage • Investment Consultancy • Asset Management • Overseas Agency

Funds

• Publicly-offered Funds • Asset Management • Investment Manager • Qualified Domestic

Institutional Investor

Traditional

Conference-

regulated

Bodies

2014

Working Meeting on

National Security

and Futures

Regulation

Mr. Xiao Gang noted that

the segregated

institutional businesses,

such as security, futures

and funds, would be

united and the relevant

institutions would be

allowed to apply for cross-

licenses.

9 New Regulatory

Policies Explore the cross-licenses

among security, fund

management, futures as

well as security

investment and

consultancy companies.

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Competition and Integration Among Traditional Non-conference-regulated

Financial Institutions and Emerging Institutional Businesses

Banking

Insurance

Trust

Traditional Non-

conference-

regulated Financial

Institutions

•Bulk Commodity

Financing

•Off-exchange

Businesses of

Bulk Commodity

•P2P

•Crowd-funding

•Asset

Securitization

Intern

et

En

terprises

9 New Regulatory Policies： Support the applications of other eligible financial institutions for security and futures business

licenses on the basis of risk remoteness.

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AliFinance • Micro-credit

Platform

Alipay • Third-party

Payment Platform

Tianhong Funds

• Fund Sales

Alibaba

Hundsun Electronics

• Financial software and online service provider

Expansion of Internet Enterprises into the Capital Market

Business Licenses for

Fund Payment and

Clearing

Baidu

Jingdong

Suning

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Fully-licensed Financial Holding Groups

CITIC Groups Everbright Group

Ping An Group

Banking

Security

Futures

Insurance

Funds

Trust

Leasing

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Prospective Industry

Structure of Futures

Companies in the Future

Integrated Licenses –

Conglomeration

Professional Companies – Differentiated

and Specialized Operations

Possession of Futures Licenses

by Other Institutions

Entry of New Entities

Issues with Market Structure after Cross-licenses Among

Futures Companies

What are the changes in the future market

structure?

Non-conference-regulated

institutions apply for business licenses

Cross-licenses among

conference-regulated

institutions

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Main Contents








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Registration-based Mechanism is the Primary Method for

Launching Products in Well-established Futures Markets

Future

Products

Launch

Mechanisms

Registration

-based

Mechanism

Approval-

based

Mechanism

Review-

based

Mechanism

Guided by the market-oriented approach of ―Invisible

Hand‖, the mechanisms will delegate the responsibilities

for providing the appropriate products to the exchanges to

maximize the role of the market and avoid excessive

market intervention.

The exchanges review the compliance of products to

be launched in pursuance of rules and regulations. As

long as a new product satisfies the statutory criteria

for market launch, its trading may start upon approval

by the competent authorities.

New products developed by exchanges must be reviewed

by the futures regulatory bodies before being launched in

market. The mechanism is characterized by government

intervention and the most likely to overlook market

needs.

Registration-based

Mechanism

Approval-based

Mechanism

Review-based

Mechanism

Level of Market Orientation

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The Evolving Product Launch Regimes in Futures Markets of China

In early market

•The exchanges

used to decide

the new products

launched

•Reckless

launches of

products resulted

in multiple risk

hazards

1993

•The State

Council started

the first round of

rectification by

issuing the

Circular on

Putting a

Resolute Halt to

the Reckless

Development of

Futures Markets

1998

•The State Council

stipulated that

―China Securities

Regulatory

Commission may

adjust products

launched based on

market needs‖ in

its Circular on

Further

Rectification and

Standardization of

Futures Markets.

1999

•Interim

Regulations on the

Administration of

Futures Trading,

which specified that

products launched

required CSRC

approval, was

implemented. The

mechanism evolved

into a joint-review

mechanism in real

life practices.

2007

•Regulations on

the

Administration

of Futures

Trading

confirmed the

joint-review

mechanism.

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Lessons Learned from Registration-based Mechanism in Well-

developed Markets

Registration-based mechanism is a symbol of the

critical role of the market

• It takes CBOT an average of 45 days to launch a new product

• Eurex Exchange also develops and launches new products completely on its own without the need of government approval

Registration-based mechanism caters to the individualized

needs of the regional economy and facilitates the

establishment of pricing benchmarks for transactions in

the real economy

• When crude oil products were launched in the U.S., different crude futures contracts were designed for different regions: WTI contracts reflecting the Cushing Port, crude oil contracts reflecting the Gulf region, and crude oil contracts reflecting the Louisiana region etc.

• Gradually, WTI products stood out from its competitors and became one of the main crude oil price benchmarks in the world

Registration-based mechanism serves to enhance the competitiveness of futures

exchanges

• London International Petroleum Exchange and NYMEX launched similar energy contracts, but the latter launched its products earlier.

• After its acquisition of International Petroleum Exchange, ICE duplicated the crude oil futures contracts of NYMEX in large quantities, which significantly boosted its crude oil futures transaction to half of the world’s total volume.

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The Prerequisites for Implementing the Registration-based Futures Product Launch

Mechanism Have Been Mostly Met in China and the Relevant Risks Can be Controlled

Market-oriented reform of product launch mechanism is an essential step towards enhanced futures market competitiveness

Bohai Commodity Exchange has launched over 80 contracts, some of which have become pricing benchmarks. Shanghai Clearing

House has developed RMB forward freight contracts with iron ore and steam coal swaps to be launched in June. Singapore

Exchange and CME have both developed products in relation to China’s iron ore.

Market-oriented reform of product launch mechanism is the inevitable path to the further development of futures market functions

Product operations in exchanges are of ―Exclusive‖ and ―Monopolistic‖ nature and face inadequate external competition. Both the motivation for and approaches to product improvement are limited.

Accelerated product launches in futures markets and market functions will become the bottleneck

There are 42 futures products in China, 9 of which were launched in2013. The increases in client and capital volumes are not significant and the market participants still comprise mainly of small and medium investors.

Legislation in futures markets will be further improved and market operations more standardized

―One Regulation and Nine Measures‖

Strong growth of futures markets with comprehensive and effective risk control

―Five-in-One‖ Risk Prevention and Control System

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Steady Promotion of Registration-based Mechanism in Futures Market

To adhere to the market-oriented reform and promote administration streamlining, power delegation and regulatory transformation and implement the step-by-step reform towards

registration-based mechanism in futures markets

Step 1

In the transition period, existing stock product,

such as soybean oil, bean pulp and corn

contracts, will be the focus

Step 2

To seize the opportunity of the legislation of the Futures Law and

implement the various reform tasks towards the registration-based

mechanism

Step 3

To consider separate launches of the same products at futures

exchanges and local trading platforms in

pursuance of the Futures Law and allow cross-platform trading and

cross-market delivery of products under the same

category.

In addition

To safeguard against potential risks, properly conduct researches and

preparations, cater to the needs of corporate entities, strengthen

market guidance and propaganda and establish

well-formulated risk response mechanisms and

contingency plans.

To emphasize the systematic, integral and synergetic reform approach and promote the

overall progress of registration-based mechanism

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Main Contents








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The Globalization Trend of Exchanges

2005

Archipelago Holdings, the U.S.

Acquired by: NYSE

Value: USD 2.3 Billion

2006

Euronext, the Netherlands

Acquired by: NYSE

Value: USD 10.2 Billion 2007

Chicago Board of Trade

Acquired by: Chicago Mercantile Exchange

Value: USD 11 Billion

2007

International Securities Exchange, the U.S.

Acquired by: Eurex Exchange, Germany


2007

OMX Group, Sweden

Acquired by: NASDAQ


2008

New York Mercantile Exchange

Acquired by: Chicago Mercantile Exchange


2008

São Paulo Stock Exchange (Bovespa)

Acquired by: BM&F


2010

TMX Group, Canada

Acquired by: London Stock Exchange


2010

NYSE Euronext

Acquired by: IntercontinentalExchange Inc, the U.S.


Major M&As among Global Exchanges Completed Since 2000

http://www.google.com.hk/url?sa=i&rct=j&q=global&source=images&cd=&cad=rja&docid=3WPKNexQUo2oiM&tbnid=fUqIvwJjJ8DRVM:&ved=0CAUQjRw&url=http://www.internationalpaper.com/&ei=wdgiUo3bK8TOiAeWrIHQDg&psig=AFQjCNGagee7Xji7Oao02q4z9TKQ8rBzsQ&ust=1378101166370833

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Conglomeration of Exchanges through the Development of CME

1848

Chicago

Board of

Trade

(CBOT)

was

established

1872

Butter and

Cheese

Exchange

of New

York was

established.

Subsequent

ly it

became

New York

Mercantile

Exchange

(NYMEX)

1898

Chicago

Butter and

Egg Board

was

established.

Subsequent

ly it

because

Chicago

Mercantile

Exchange

(CME)

1933

Commodity

Exchange

(COMEX)

was

established

1994

COMEX

and

NYMEX

merged into

the new

NYMEX

2002

CME was

publicly

listed.

2005

CBOT was

publicly

listed.

2006

The new

NYMEX

was

publicly

listed.

2007

CME and

CBOT

merged into

CME

Group.

2008

CME

Group

acquired

the new

NYMEX.

24

Development History of ICE

1997

• Commenced OTC trading services in the energy market

2000

• Established ICE

2001

• Acquired International Petroleum Exchange

2005

• Publicly listed in NYSE

2007

• Acquired NYBOT

2010

• Acquired Chicago Climate Exchange

2013

• Acquired NYSE Euronext

ICE Group

14 security and futures exchanges

On-exchange markets

Off-exchange trading

platforms

5 clearing houses

Pioneered with global off-exchange clearing

services

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A Size-defying Acquisition

Acquired

In 2013, ICE successfully acquired the 220-year-old Euronext Group, the parent company

of NYSE. The acquisition has provided IC

The 13-year-old The 220-year-old

https://www.theice.com/

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Corporatization Trends among Foreign Futures Exchanges

1998

• London International Financial Futures and Options Exchange

• Eurex Exchange

2000

• Sydney Futures Exchange

• Hong Kong Exchange

• Singapore Exchange

• Montreal Exchange

2002

• Chicago Mercantile Exchange

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Current Futures Exchange Regime in China

Regulations on Administration of Futures Trading

• Article 7 Non-profit-seeking futures exchanges are under autonomous administration in pursuance of their respective articles.

• Article 14 Incomes of futures exchanges shall be administered and utilized in pursuance of the relevant regulations in China and shall be first used to ensure the operations and improvements of the venues and facilities of these futures exchanges.

Regulations on the Administration of Futures Exchanges

• Article 4 Futures exchanges may take the form of membership-based or incorporated organizations. The registered capital of membership-based futures exchanges shall be equally divided and contributed by its members. Incorporated futures exchanges shall take the form of limited liability companies.

• Article 19 Membership-based futures exchanges shall convene General Meetings of Members. A General Meeting of Members is the body of authority of a futures exchange and shall be attended by all members.

• Article 36 Incorporated futures exchanges shall convene General Meetings of Stockholders. A General Meeting of Stockholders is the body of authority of a futures exchange and shall be attended by all stockholders.

CZCE

•203 members in total

•162 (80%) of which are futures company members

DCE •173 members in total

SHFE

•Over 200 members in total

•77% of which are futures company members

Membership

-based

Incorporated

CFFE

SHFE

CZCE

DCE Shenzhen

Stock Exchange

Shanghai Stock

Exchange

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Prospective Future Development of China’s Futures Exchanges

(1) Incorporated futures exchanges will be mainstream

(2) Enhanced scale and strength through stock offering and M&A

(3) Business model could be membership-based

(4) Registration-based product launch mechanism

(5) Integration with spot markets and operation of off-exchange trading platforms

(6) Products of foreign exchanges may be listed

(7) Going global for acquisition of foreign exchanges

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Main Contents



• Current Development Status of Off-exchange Markets

• Limitations of Relevant Laws and Regulations



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The 394 bulk commodity exchanges surveyed by 100ppi.com

share the following features:

Increasingly Diversified Trading Modes

Mainly spot trading Along with competitive price trading, continuous trading, tendering and auction, deferred trading, warehouse receipt

trading, online mart and online trade fair etc.

Comprehensive Product Range

Agricultural products around 34.34%

Metal products around 29.46%

Chemical products around 14.73%

Energy products around 10.98%

Uneven geographical distribution based on spot markets

Most in the eastern coastal regions Followed by Central China Least in Western China

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Development Features of Bulk Commodity Market

Clear trend of conglomerated development in e-trading

markets

Large groups increasingly interested in participating in

commodity markets

Newly established exchanges place greater emphasis on

connection with spot trading

• Geographic centralization

• Exchange Conglomeration

• Centrally-administered SOEs

• SOEs

• Large groups

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Analysis of Current Markets

In 2013, China, with foreign commodity trade volume of USD 4.16 trillion, became the largest

foreign commodity trader in the world. This underlined the pressing need for transformation in

the commodity market structure.

(1) Bulk commodity market is an innovative development model from traditional commodity market to modern market forms.

(2) The main function of most bulk commodity markets is still to serve regional markets.

(3) Modern economic development has blurred the boundaries of future spot, forward and futures market and presented regulation with new challenges.

(4) In the transformation towards modern commodity markets, decentralization is being replaced by centralization and non-standardization by standardization. Along with the application of Internet technology and the establishment of the security deposit system, past standards can no longer accurately determine the nature of a market.

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Prospective Development Model of Bulk Commodity Markets

• Vertical integration of industry chain Multi-platform

exchange groups

• Supply chain financing + logistics + market

Integrated exchange groups with

comprehensive functions

• Provide regional, specific and/or niche industries and markets with specialized services

Professional exchanges

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Multi-level Bulk Commodity Markets under the Regulation of

Four Government Documents

Bulk Commodity

Markets

CSRC 2012

Regulations on the Administration of Futures Trading

General Office of the State Council Document No. 37

Implementation Opinion on the Rectification of Various Trading

Venues

Ministry of Commerce

2013 Special Rules on

Commodity Trading on Spot Markets (Trial)

State Council Document No. 38

Decision on the Rectification of Various Trading

Venues and Effective

Prevention of Financial Risks

•Standardized contract trading with

standardized bulk commodity contracts as

the trading object, employing centralized

electronic trading modes and allowing

traders to settle transactions at hedge

positions without the need for settlement

or delivery of actual commodities.

• ——Document No. 37

Bulk commodity

forward trading

•Including call auction, continuous

auction, e-matchmaking, anonymous

trading, market maker and others.


Centralized trading modes

•One type of such contract is centrally

drawn up by the trading venue, fixing all

terms and conditions except for price and

specifying the delivery of a certain

quantity of subject commodity at a specific

future time and location;

•Another type is also centrally drawn up

by the trading venue, specifying the

buyer’s right to buy or sell the subject

commodity at a specific price at a certain

future time.


Standardized contracts

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Work Summary of Rectification of Bulk Commodity Markets

By the end of 2013, except for

Tianjin and Yunnan Province,

the rectifications of 34

provinces, districts and

municipalities (including

municipalities with independent

planning status) had passed the

acceptance inspection of the

joint conference and the overall

acceptance inspection of the

rectification has come to an

end.

Since the rectification started

(2011-2013), over 200 trading

venues of all sorts had been

closed across the country.

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Main Contents





37

The Third Plenary Session of the 18th CPC Central Committee

To accelerate the development of a modern market system and

effectively eliminate market barriers,

And improve the efficiency and fairness of resource allocation. To set forth fair, open and transparent market rules

• To implement a unitary market entry system and allow various market entities to enter all areas (other than those on the Negative List formulated) in a legal and equal manner.

• To push the reform of the domestic trade circulation system

To optimize the market-dominated pricing mechanism

• To leave all prices that the market can form to the market without inappropriate government intervention.

• To promote price reforms in areas such as water, petroleum, natural gas, electricity, transportation and telecommunication and liberate prices in competitive processes.

• To optimize the price formation mechanism for agricultural products and highlight the market’s role in price formation.

All-round Furtherance of the Two Main Objectives of Reform:

Regulation and Governance

The Core of Economic Reform:

To properly handle government-market relations, leverage the critical role of market in

resource allocation and enable governments to play their role better

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Old Policies New Policies

Stock market remained bearish for years

Serious problems with division of

tradable and non-tradable shares

Main

Tasks

The development of capital markets

featuring transparency, efficiency,

reasonable structure, well-established

mechanisms, comprehensive functions

and safe operations.

“Highlight”

Highlight 1: optimize the product launch approval

system

Highlight 2: resolve the problem with division of

tradable and non-tradable shares

Highlight 3: launch commodity futures products at a

steady pace

Highlight 4: leverage self-discipline of the industries

and supervision by public opinions

Highlight 5: actively develop institutional investors

Highlight 6: actively trial the foreign eligible investor

system

Background Institutional problems still exist

All-round furtherance of reform

To form a standardized and transparent

multi-level capital market featuring

reasonable structure, comprehensive

functions, stable and efficient performance

as well as openness and inclusiveness.

Comparison between the Old and New Versions of 9 Regulatory Policies

Highlight 1: reform towards registration-base

mechanism

Highlight 2: multi-level capital market

Highlight 3: promote the development of futures

markets

Highlight 4: market value management, stock

incentives, employee ownership program

Highlight 5: Internet finance

Highlight 6: approval of direct investment in China

by foreign individuals

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CSRC Studies and Implements the 9 New Regulatory Policies

To thoroughly appreciate the great significance of capital markets for

economic restructuring and upgrading, social development 1

To fully seize the historic opportunity for the accelerated development

of the capital market, the growth of which is at a new 2

To adequately appreciate the significance and pressing urgency of

enhanced percentage of direct financing and fully realize the 3

To adequately appreciate the in-depth elaborations in Several Opinions

on the proper handling of ―Four Corresponding Relations‖ 4

To adequately appreciate the series of new ideas, policies and measures

proposed in Several Opinions and further strengthen the 5

40

“Four Corresponding Relations” in the 9 New Regulatory Policies

Market Government

Self Risk Commitment

Enhanced Investors’ Protection

Innovative Development

Risk Prevention

Solid Progress Steady

Implementation

41

To Advance the Development of Futures Markets

To implement policies and measures encompassing

capital markets’ support for Shanghai FTA

To further improve treasury bond yield curve that reflect market demand and supply

relations

To actively develop channels and mechanisms for futures

markets to serve the agricultural sectors

To achieve solid progresses in the

development of international crude oil

futures markets and endeavor to launch

crude oil futures by the end of the year

To increase the number of treasury

bond futures products

To escalate the R&D and launches

of pro-agriculture futures products

42

To Enhance the Competitiveness of Security Futures Services

To lower entry criteria, encourage competition and explore functional regulation.

To speed up the development of relevant rules governing the establishment and business license management of security futures institutions

To expand basic functions and actively support innovations in businesses and products

To quickly issue opinions on further promoting the innovative development of the funds industry and futures agencies and encourage the innovative development of the funds industry and futures agencies in a steady and orderly manner.

43

Directions of Futures Market Reform

• Delegation of approval authority

• Set up Negative Lists

Administration Streamlining and Power Delegation

• Eliminate monopoly

• Diversified License Holders Open up Market Entry

• More favorable policies

• Close the revolving gate

Removal of Administrative Elements

• Diversified Property Right Structure

• Reform towards Incorporation and Shareholding Mixed Ownership

• Active utilization of Internet technology

• Innovations in concepts, products, technologies and trading models

Encourage Innovation

44

Conclusion: Next Decade for Futures Market Development Reform

• The next ten years are the critical ten years for the development of futures

markets, not only promising a bright future and tremendous potential but

also presenting great challenges.

• Real economy is the foundation of futures markets and spot, forward and

futures will be closely integrated. Simple segregation will be detrimental for

the overall market development;

• The core of futures market reform lies with the proper handling of

government-market relations to encourage market development through

enhancing government governance and releasing the benefits of the Reform;

• Adequate market orientation is the direction of futures market

development. On one hand, power should be harnessed through regulation

and ongoing efforts should be made in anti-corruption and anti-monopoly.

On the other hand, the efficiency of the multi-level market shall be enhanced

through competition and both the multi-level approach and diversification

shall be emphasized.

45

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