Derivatives exchanges in China and India have experienced explosive growth in recent years, sparking a surge of interest from traders and investment firms in other parts of the world. But accessing those markets can be challenging, according to global brokers and trading system vendors operating in the region. In Singapore on 30 November, Jonathan Finney, managing director of APAC business development at Citadel Securities, led an FIA Asia conference panel discussion highlighting what lies ahead for the APAC region.
Accessibility and connectivity
Improvements in accessibility could support the transition to more investment and trading in China, according to Lei Li, APAC head of sales for Bank of America's futures, options, OTC clearing in Asia. She explained that clients will not trade these contracts if it is too complicated to access the markets. “The challenges clients have right now, it’s a lot around ease of access...” She added that China in particular needs more defined regulation to meet customer needs.
Alice Pocklington, executive vice president for Asia-Pacific at software provider Trading Technologies, talked about a "knowledge gap" when it comes to accessing markets in the region. A survey commissioned by TT on European attitudes towards trading with Asia, revealed that China was viewed as the most difficult market to connect to, followed by India.
Pocklington described the kinds of issues that customers bring up in their discussions with the firm. "There’s the geopolitical risk, there’s understanding the government policies, knowing how to connect, knowing who to partner with, understanding the local rules and regulations at the exchanges. These are all very legitimate questions that our customers are asking.”
Despite these challenges, Trading Technologies is seeing rapid growth in the number of customers using its systems to trade futures and options listed on Chinese exchanges, she said. “We’ve seen in the last three years alone, the participation in China markets on our platform grow by six hundred plus percent...So, yes there are challenges, but the opportunity is clearly there and it’s obviously an opportunity that people really want,” said Pocklington.
Another key factor is regulation, and participants in the discussion commented that China has taken a number of steps to make its futures markets more accessible from abroad. That includes designating certain contracts as "international", meaning that they can be traded directly from overseas.
“From a regulatory standpoint, it's one of the markets that we see the fastest pace of regulatory change...we’ve seen access routes enlarge,” said Kate Simpson, APAC head of clearing product development and strategy at J.P. Morgan. She noted that there are now 15 products designated as international available through that route.
Simpson also noted the importance of participants “understanding the context,” of the regulation in these markets and the implementation and timeline of new regulation “because it can come into play incredibly quickly.”
On the other hand, Singapore continues to benefit from having a regulatory environment that operates in a way that is familiar to global brokers. Simpson commented that the Monetary Authority of Singapore is the “gold standard” for how regulators should oversee markets, but it also welcomes innovation through its sandbox program and “entrepreneurial” approach.
She also praised the Singapore Exchange for its partnership with the NSE International Exchange in India. Under that partnership, trading in futures and options based on Indian stocks takes place in India, but clearing is managed through SGX in Singapore. That hybrid approach allows global brokers to manage their counterparty risk through a clearinghouse regulated by the MAS.
Chip Clairmont, CEO of ABN AMRO Clearing Tokyo and Chairman of FIA Japan, highlighted a recent resurgence of interest in Japan’s derivatives markets. He emphasized a "constant focus on improvement" at the Japan Exchange Group, pointing in particular to the restructuring of its stock market, a shift in focus on corporate governance, the introduction of a comprehensive derivatives exchange, the first listing of actively managed ETFs and more.
Additionally, Clairmont discussed the exchange's launch of J-Quants as an example of broadening accessibility to market participants. J-Quants is an API data platform that “allows retail investors to have access directly to JPX provided market data, so they can do their own trading analysis,” he explained.
George Harrington, managing director and global head of fixed income and derivatives at MSCI, talked about the increasing importance of China's markets in international investment portfolios, and stressed the value of derivatives in hedging the risks in those investments. He also highlighted MSCI’s recent move to partner with Hong Kong Exchanges and Clearing as a way to leverage that exchange's position as a gateway to China's markets.
