2015 Futures Industry: Full of Storms and Waves

Date£ºJan 15, 2016
Source:Shanghai Financial News

In 2015, storms and waves have risen in the futures industry in China, presenting great prosperity in the first half year and great storm in the second half year. The unpredictable market trend has produced great challenge to the development of the futures industry. In face of the dilemma of ¡°living at the mercy of the elements¡± of traditional brokerage, developing innovative business, improving derivatives system and creating a wealth management platform have become the new topics for futures companies. Next, how the industry shall realize the target of transforming and expanding the diversified development mode has become the new focus of 2016.

Great Rise and Fall of Stock Index Futures

Last year, the futures market experienced a ¡°roller coaster¡± and all companies in the futures industry cannot bear the great contrast. According to the latest statistics of China Futures Association, the accumulated trading volume in China¡¯s futures market was 3.578 billion contracts from January to December and the accumulated turnover was RMB554.23 trillion, up by 42.78% and 89.81% respectively year-on-year. Judging from these two indexes, the trading volume and the turnover have both set the record high and exceeded those of 2014.

However, the performances were not balanced. According to the statistics in the first half of 2015, the accumulated trading volume in the futures market from January to June exceeded that of the whole year of 2014. Taking financial futures for example, the accumulated trading volume in 2015 was 341 million contracts and the accumulated turnover was RMB417.7 trillion, up by 56.66% and 154.7% respectively and taking up 9.53% and 75.38% respectively in the domestic market. In the first half of the year, the turnover of financial futures once accounted for over 80% of the total in the domestic futures market. However, as affected by the pullback of the domestic stock market and a series of strict control measures targeting the stock index futures from July, the trading volume of stock index futures has decreased sharply since July.

In terms of the commodity futures, the accumulated trading volume in 2015 was 3.237 billion contracts and the accumulated turnover was RMB136.47 trillion, up by 41.46% and 6.64% respectively. Such growth, however, was just contrary to that of the stock index futures. The trading of commodity futures in the first half year was inconspicuous. In the second half of the year, the trading in the stock index futures cooled down; the trading volume and the turnover of commodity futures increased significantly; and the trading of such industrial products as nonferrous metals and precious metals increased sharply. In November and December, the turnover of industrial products futures have both accounted for over 50% of the total.

With regard to this situation, Wang Jun, President of the Founder CIFCO Futures Research Institute, believed that with the investment participation in the rules revision of financial futures later, the growth of the trading volume and turnover in the financial futures market will slow down or decrease while the commodity futures market will attract the participation of large amount of capital and the value depression of the commodity futures market has become the best reason for the participation of the market capital. ¡°The sharp increase of the turnover in the commodity futures market is crucial to the stability of the trading in the domestic futures market and the overall customer equities of futures companies are expected to maintain between RMB380 billion and RMB400 billion.¡±

In fact, the breathtaking situation of the stock index futures would be deeply impressed in the futures market in 2015.

According to the research report of Hua¡¯an Futures, the stock index futures market in 2015 can be divided into three stages. The 1st stage is from the beginning of 2015 to June 14. The capital market in China, having experienced the bear market of nearly 4 years, finally welcomed a mega bull market in the second half of 2014. Influenced by such stimulus policies as state-owned enterprise reform, the ¡°One Belt One Road Initiative¡±, the Internet + and the PPP Program and the easy monetary policy in China, the bull market continued in the first half of 2015 and once even evolved into the mad bull situation, with the SSE index soaring from 3,050 at the beginning of 2015 to 5,178 (up by 69.77%). In the first half of 2015, the China Financial Futures Exchange (CFFEX) listed the 10-year treasury bond futures, SSE 50 and CSI 500 stock index futures successively and meanwhile China¡¯s securities market was very hot, which has attracted large amount of hedging funds to participate in the trading of stock index futures.

However, in the end of May, the stock market fell from the pinnacle. The 2nd stage is from June 15 to August 26 of 2015, during which the domestic stock market experienced the profound adjustment caused by checking financing and lowering lever and suffered a great setback. As a result, the SSE index fell from the high point of 5,178 to the bottom of 2,850, with the decrease of 44.96%. In this stage, the management authorities issued the market-rescue policies for many times.

To restrain over-speculation and strengthen the supervision on unusual trading, the supervision authorities have begun to strengthen the management and control on stock index futures in gradient since August 2015. On August 25, 2015, the CFFEX adjusted the trading deposit of non-hedging position-holding from 12% to 20% in gradient within three days and meanwhile limited the amount of the opening transaction of a single stock index futures product in a day to 600 contracts. On August 28, 2015, the CFFEX acted again and increased the trading deposit of non-hedging position-holding directly to 30% and limited the amount of the opening transaction of a single stock index futures product in a day to 100 contracts, which were put into force from August 31. On September 2, 2015, the CFFEX made the third action, limiting the amount of the opening transaction of a single stock index futures product in a day to 10 contracts, increasing the trading deposit of non-hedging position-holding to 40%, and enhancing the position-closing fee in a day to 2.3¡ë. Besides, the CFFEX punished 164 clients (deducting the repeated), including 152 persons opening positions of over 600 contracts in a day, 13 canceling orders for 400 times and above in a day and 1 making self-trading of 5 times and above, for restricting the position-opening for one month. After the implementation of the most strict management and control measures ever, the trading volume of the three major stock index futures have shrunk and remained at a ground level and the operation of futures companies have suffered the influence of different degree.

The 3rd stage is from August 27 to December 31 of 2015. In this period, domestic stock market got stabilized and the SSE index rose, with fluctuation, to 3,579 from 2,850, up by 25.58%, as influenced by a series of policies, including the position limit for stock index futures, the IPO suspension, the limit on margin trading and securities lending, the limit on the short selling of SSE 50 ETF options and the strengthening of supervision on the financial market.

The stock index futures, as an investment tool with the largest market size, suffered consecutive trading limit and ended at the limit of 10 contracts every day. And its active market atmosphere quickly dropped to the freezing point and its trading remained at a ground level due to the strict management on the high-frequency program trading.

Wang Jun said that though the trading of stock index futures shrank rapidly after the issuing of management and control measures by the CFFEX in the second half of 2015, the trading volume and turnover of financial futures, especially the stock index futures, were great on the whole, which is the major reason for the record-breaking of the trading in the futures market.

Commodity Futures Catching up from behind

Apart from the ups and downs of the financial futures, the several steep falls of international bulk commodities have brought new topics to the domestic futures markets.

In 2015, as the bulk commodity market suffered the three bad news of the great drop of international oil prices, the rising of the US dollar and the decrease of the global commodity demand, more downs and less ups were presented in the market in the whole year and the prices of over 85% products ended at a lower level. In particular, the number of products with the decrease of over 10% in the domestic futures market exceeded 20. Nonferrous metals, steel and chemicals presented remarkable drop and the prices of copper, aluminum, nickel, steel and iron ore in the fourth quarter broke the record low level of the previous several years (over 5 years).

According to the statistics of ICIS and SCI International, the prices of over 85% of the domestic commodities are lower than those on the last trading day of 2014; nonferrous metals, chemicals and black items present great drop, with bitumen taking the lead and presenting the drop of 46.45%, iron ore following closely with the drop of 36.31% in the whole year. Among the few products with prices increase, most presented the growth of less than 10% in the whole year and only white sugar outshined others with the price increase of 23.13%.

Guo Zhihong, an analyst of Hongyuan Futures, said that under the ¡°cooling¡± of the stock index futures trading in the second half of 2015, futures companies strengthened the efforts on developing commodity futures business. On the background of the ¡°continuous drop¡± in prices, many spot enterprises actively entered into the market for hedging and some of the stock index futures flowed to the commodity futures, which have led to the remarkable increase of the trading activeness of commodity futures in the second half of 2015 and making up the decreased trading of stock index futures to some extent, thus supporting the record-breaking of the futures trading in 2015.

Statistics show that, with regard to the products, those whose accumulated trading volume ranked among the top 5 in 2015 are steel rebar, methanol, soybean meal, CSI 300 stock index futures and rapeseed meal, taking up 15.12%, 8.8%, 8.09%, 7.74% and 7.31% respectively among the total in China. Commodity trading has gradually recovered.

In the single month of December, the trading in the futures market presented increase for the second consecutive month. In December, the trading volume in the domestic futures market was relatively higher than the previous month. Calculated on a single side, the trading volume in the domestic futures market of the month was 337 million contracts and the turnover was RMB15.11 trillion, up by 6.35% and 73.83% respectively year-on-year and up by 3.79% and down by 5.55% respectively month-on-month.

Specifically, the trading volume of Shanghai Futures Exchange in December was 129,518,491 contracts and the turnover was RMB6,666.418 billion, accounting for 38.45% and 44.13% of the total in the domestic market, up by 14.25% and down by 2.76% respectively year-on-year, and up by 26.24% and 3.89% respectively month-on-month. The trading volume of Dalian Commodity Exchange in December was 131,330,474 contracts and the turnover was RMB4,308.755 billion, accounting for 38.98% and 28.52% of the total in the domestic market, up by 76.9% and 32.97% respectively year-on-year, and up by 2.33% and 2.48% respectively month-on-month. The trading volume of Zhengzhou Commodity Exchange in December was 74,198,703 contracts and the turnover was RMB2,118.334 billion, accounting for 22.02% and 14.49% of the total in the domestic market, down by 11.08% and 13.16% respectively year-on-year, and down by 18.55% and 20.65% respectively month-on-month.

And the trading volume of the CFFEX which has outshined others previously was 1,842,813 contracts in December and its turnover was RMB1,941.773 billion, accounting for 0.55% and 12.85% of the total in the domestic market, down by 95.97% and 95.7% respectively year-on-year, and down by 27.21% and 25.7% respectively month-on-month.

Wang Jun analyzed that at present, the value ¡°depression¡± of commodity futures has gradually received capital concern, the hedging efforts of spot enterprises are expected to be further strengthened, and the further growth of the trading data of commodity futures is worth expecting. He also said that the growth of trading volume in the futures market might be higher than that of the turnover in 2016 due to the continuous lowering of commodity futures prices.

Frequent Highlights in Innovative Business

Apart from the later powering of commodity futures, futures companies also started to focus on innovative business and expect to create a diversified development atmosphere under the irrational market environment. Li Yongmin, President of Gelin Dahua Futures Research Institute, said that the assets management business of futures companies and the business of risk management companies have driven in the ¡°fast traffic lane¡± of development in 2015. Futures companies¡¯ innovative businesses that have begun to take shape have become the major force promoting the record-breaking of the trading of futures market in 2015.

Previously, the ¡°2015 China Futures Market Blue Book¡± showed that in the capital market, futures companies are no longer restricted to the traditional brokerage. The futures assets management has made substantial progress in 2015 and the assets management business of futures companies have embraced explosive development affected by the previous accumulation of the industry and the conduct of ¡°one-to-many¡± business. Till September 30, 2015, the business scale of the assets management of futures companies has reached RMB81.9 billion while that in 2014 was only RMB12.4 billion.

After the relaxing of the ¡°one-to-many¡± business of futures assets management since the end of 2014, the futures assets management field has welcomed a ¡°warm spring¡±. Though the market presented great fluctuation and the futures¡¯ private placement was impacted by the new rules of stock index futures, statistics from futures assets management website (www.qhziguan.com) showed that the average yield rate of the 347 futures¡¯ assets management accounts with continuous performance records reached 90.91%.

According to the statistics from this website, till December 31, 2015, it has included 1,065 single-account products with CTA strategy. In 2015, 472 futures¡¯ assets management single accounts were added in 2015, with nearly 40 products newly registered every month on average and up by 66.78% year-on-year (189 were added in 2014). In particular, 347 had continuous performance record and their average yield rate was 90.91%; 230 realized positive return, taking up 66.28% of the total.

However, most futures¡¯ assets management single accounts are small. Among the 347 single accounts, only 161 are weight wet ones with the capital of over RMB1 million, taking up less than 50%. And the futures private placement presents great fluctuation due to its leverage character. But the risk is always related to the return. Among the 347 products, the average yield of subjective strategies is 100.24% and that of quantification strategy reaches 75.90%.

On January 12, Yong¡¯an Futures exposed the unaudited major financial data and indexes of 2015. The data show that all operational indexes of Yong¡¯an Futures in 2015 present sharp increase and its net profit exceeds RMB470 million, making it the first futures company with the annual net profit exceeding RMB400 million.

According to the ¡°Notice of 2015 Annual Earnings Pre-announcement¡± released by Yong¡¯an Futures in National Equities Exchange and Quotations (consolidated financial data), in 2015, the operation revenue of Yong¡¯an futures is about RMB4.382 billion, up by about 75% against the previous year; its net profit attributable to the parent company owners is about RMB474 million, up by about 51% compared with the previous year. Till the end of 2015, its total assets are RMB24.552 billion, up by about 38% compared with the end of 2014, and the profit attributable to the parent company owners is about RMB4 billion, soaring about 128% compared with the end of 2014.

Insiders analyzed that, with regard to the innovative business in recent years, Yong¡¯an Futures has maintained the ¡°bellwether¡± position in the industry. And its innovative business has made significant contribution to such a good business growth against the strict management and control on the stock index futures in the second half of 2015.

Yong¡¯an Futures made clear in the Notice that the reasons for the performance variation last year are as follow: first, Yong¡¯an has maintained good development momentum in 2015 and the customer benefits have kept increasing, thus promoting the great growth of the business income; second, the emerging businesses have made greater contribution and the scale and capacity of the assets management business have been greatly enhanced, thus leading to the significant earnings growth; third, as the development pace has been quickened, the risk management business has gradually become the new profit growth point of Yong¡¯an.

In fact, at the time when the development of the futures industry has landed in a predicament in face of the unprecedented supervision measures on stock index futures, transformation and innovation has been the main direction to be targeted by most futures companies next.

At the Futures Forum of the 13th China¡¯s Financial Annual Champion Awards held lately, many futures companies said that they plan to make breakthrough in wealth management through risk management.

Lei Bo, Managing Director of COFCO Futures, said that there are 3 keywords for the future development of futures companies. The first is mixed operation as the integration among securities, banks, futures and funds will be increasingly greater; the second is internationalization with those in China going out and those outside coming in; the third is the differentiation of the results of the first two ¨C futures companies will be gradually transform into channel companies, or companies with marketability, or professional hedging companies, or directly into a certain department of a certain institution.

Lu Dayin, General Manager of Orient Futures, said that futures companies should never limit itself to the simple brokerage business competition before but create a big platform for wealth management by focusing on derivatives and regarding risk management as the entry point. Large futures companies abroad are not trading or channel futures companies but adopt the big investment banking model. For example, Citigroup Inc manages huge volume of futures business, which is related to the crude oil. In the domestic futures in the future, large futures companies in China must be those grasping the spot resources and meanwhile conducting wealth management.

According to the report of Founder CIFCO Research Institute, the source of the profits of domestic futures companies has shifted from handling charge to other services in recent years. The profit growth of some futures companies mainly comes from such innovative businesses as assets management, investment counseling, risk subsidiary and the over-the-counter share option while the traditional brokerage business has contributed less to the companies¡¯ profits and the handling charge rate has kept going down. As China¡¯s futures industry is welcoming the wave of transformation and innovation, the traditional pattern of taking brokerage as the main source of profits will be gradually replaced by the diversified innovative businesses and futures companies¡¯ factors of development concept, business structure and personnel quality will encounter improvement and reform. In 2016, futures companies¡¯ innovative businesses, like assets management, investment counseling, risk subsidiary and over-the-counter share options will continue to welcome a development tide as stimulated by such factors as the national policies, the internet finance, the entity enterprises and the over-the-counter share options.

Numerous Focuses in the Industry of 2016

2015 is the first year of the listing of domestic futures companies and a tide of listing and financing has been raised in the domestic futures industry this year. At present, 7 futures companies in China have been listed on the New Third Board and Hong Kong Exchanges and Clearing Limited (HKEx); 3 have entered into the stage of application and pre-announcement; and many have revealed the listing attention.

On April 9, Chuangyuan Futures was officially listed on the New Third Board, becoming the 1st listing and financing futures company in China and marking that China¡¯s capital market has opened the ice-breaking journey of the listing of futures companies. Afterwards, Yong¡¯an Futures, HNA Futures, TF Futures and Hualong Futures were successively listed on the New Three Board and Luzheng Futures was listed on the HKEx. Up till now, 5 futures companies have listed on the New Three Board and 1 on the HKEx. Meanwhile, Guangzhou Futures has applied to list on the New Three Board; Radar Futures (Blog; Micro-blog) and Nanhua Futures plan to list on the main board and has entered into the stage of pre-announcement of starting prospectus; Holly Futures officially listed on the HKEx on December 30, becoming the 2nd futures company in Chinese mainland listed on the HKEx. Besides, futures companies that have completed the joint-stock system reform, including Wanda Futures, Shenwan Hongyuan (000166, Guba) Futures and Haitong Futures, have revealed the intention of listing financing.

An analyst from Founder CIFCO said that domestic futures companies have expanded their financing channels through listing financing, which will help to improve the corporate management structure, expand relevant innovative businesses, strengthen the operation competency and anti-risk capability of the company, and meanwhile lay a solid foundation for the development and growth of China¡¯s futures industry.

This person also said that domestic futures companies are expected to continue the listing fervor in 2016. Meanwhile, reorganization and merger will still be the important method for futures companies to expand the capital scale, optimize the resource allocation and enhance the corporate competiveness. ¡°It is predicted that the reorganization and merger will still prevail in the futures industry in 2016, but the reorganization will not be limited to the same industry. The cross-industry merger will be the major development trend of the futures industry in the future. We believe that through such channels as the main board IPO, the New Third Board, the overseas listing and the reorganization and merger, domestic futures companies will obtain capital to expand the capital scale through more financing channels and they will realize mutual advantages, enhance the corporate competitiveness, and promote the development of their innovative businesses through reorganization and merger, thus making the operating management of futures companies reach a new high.

Apart from wishing that futures companies will strengthen their own capability, expecting the improvement of the market environment in 2016 has become another New Year¡¯s vision of futures participants.

On February 3, Shanghai Securities Exchange issued a notice in which it decided to list SSE 50 ETF option contract product for trading from February 9, 2015. On March 30, the Shanghai Futures Exchange released the ¡°Notice on Matters Related to the Listing of Nickel and Tin Futures¡± and the trading of nickel and tin futures contracts started to from March 27, 2015. On March 30, the CFFEX issued the ¡°Notice on Matters Related to the Listing of SSE 50 and CSI 500 Stock Index Futures¡± and the contracts of SSE 50 and CSI 500 stock index futures officially listed for trading from April 16, 2015. And the CFFEX released the 10-year treasury bond contracts. The successive listing of these futures products has injected new vigor to the market.

However, due to the slump in the market, some new products which could have been listed in 2015 were suspended, including the crude oil futures which were under preparation, the stock index futures with position limit and commodity share options and stock index share options that have been tested continuously in 2015. Taking crude oil futures for example, the China Securities Regulatory Commission (CSRC) issued the No. 16 announcement on June 26, 2015, to clarify that crude oil futures is a specified product in China and overseas traders and overseas brokers can participate in the crude oil futures trading by law, showing that the authorities have begin to pave the road for the successfully listing and trading of crude oil futures in China.

On December 4, 2015, Li Chao, Deputy Chairman of the CSRC, made a speech at the 11th China International Derivatives Forum (Blog, Micro-blog). He pointed out that the CSRC has coordinated with the Ministry of Finance, the State Administration of Taxation, the People¡¯s Bank of China, the General Administration of Customs and the State Administration of Foreign Exchange to successively introduce the supporting policies related to crude oil futures and the preparation for the listing of crude oil futures is underway. It shows that the preparation for the listing and trading of crude oil futures has come to a close and is just about to list.

Besides, the commodity share options have been accelerated to settle down and the stock index share options are waiting for the good news. The commodity share options are expected to be launched in 2016 under the circumstance of China¡¯s reform of the supply front and the reducing of capacity and stock. The launching of commodity share options will, on one side, provide industrial customers with sophisticated risk management service. Individualized and diversified risk management portfolio can be designed through the combination of commodity share options, futures and spot goods, which will reduce the risk of spot enterprises and help China¡¯s industrial customers to reduce capacity and stock. On the other hand, investors can engage in the investment and trading of various portfolios through share options and futures and the risk-return structure of the futures market will thus be increasingly improved.

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