HSBC has become the first foreign bank to offer futures margin depository services to overseas investors trading iron ore futures in China.
On Jan. 29, the bank announced it has received approval from the Dalian Commodity Exchange, China's second largest futures exchange, to offer futures margin depository services. With its new license, traders outside China can set up settlement accounts at HSBC to support their trading on DCE.
DCE is the second futures exchange in China to win government approval to offer one of its products directly to overseas investors. The first was the International Energy Exchange in Shanghai, which launched a crude oil futures contract in March 2018 that was designed specifically to attract international participation. In both cases, the government is hoping to strengthen the market's ability to provide price discovery and risk management tools for one of China's most important commodity imports.
"We will accelerate the process to attract more foreign investors," Fang Xinghai, vice chairman of the China Securities Regulatory Commission, said last May when the iron ore futures market was opened up to foreign traders. "We will internationalize all mature future contracts and exert global influence that matches China's economic status."
HSBC stressed that the new license will allow it to help overseas traders deposit their margin through in-bank transfers, making the process more efficient and convenient. Previously, overseas investors trading iron ore futures had to set up additional futures settlement accounts at qualified Chinese banks that required inter-bank transfers.
"Through the launch of this new service, we are able to help our offshore clients streamline their preparation work and operational procedures when they conduct iron ore futures trading in China, shorten the turnaround time of margin transfers and therefore enhance their capital efficiency," Patrick Zhu, head of global liquidity and cash management for HSBC in China, said in a press release. "As the leading international bank supporting China's capital markets opening, HSBC will fully leverage our cross-border connectivity to help more overseas investors access the Chinese market while the country further opens up its commodities futures market."
Dalian Commodity Exchange began to allow overseas investors to trade iron ore futures in May 2018. Iron ore is among the most widely traded futures contracts in the world, with more than 249 million contracts traded in 2018. DCE is by far the largest market for iron ore futures, reflecting both the importance of iron ore to China's steel industry and the appetite for commodity futures trading among Chinese investors. In 2018, more than 236 million contracts changing hands on DCE, making it the third most actively traded futures contract in the country.
HSBC has been actively involved in supporting cross-border investment in Chinese markets for several decades. In 2003, it was one of the first foreign custodians to offer custody services for foreign investors participating in the government's QFII program, which allows "qualified foreign institutional investors" to bring a limited amount of funds onshore for trading in certain securities markets. In 2011, it was the first foreign bank to join the Shanghai Futures Exchange as a member, and in 2013 it was the first foreign bank to provide custodial services for QFII trading in the stock index futures traded on the China Financial Futures Exchange, the country's only financial futures exchange.
Other global banks are also ramping up their presence in China's futures markets. In June, Citibank was awarded a similar license to act as a futures margin depository bank for trading on CFFEX. The bank, the first U.S. institution to receive this status, said the license would allow it to support futures trading by offshore investors who have qualified for onshore trading through the QFII program. And in March, J.P. Morgan announced that its local subsidiary was supporting both the trading and the clearing of the new crude oil futures contract listed on INE as a member of that exchange.
