HONG KONG (Reuters) - The latest step in China’s push to develop its commodities derivatives market gets under way on Monday as the Shanghai Futures Exchange (ShFE) launches a month-long test of a much-anticipated copper options contract.
The options, approved by China’s securities regulator in November, are on track to be the country’s first industrial options after sugar and soymeal launched last year.
An options contract gives the buyer the right - but no obligation - to assume a futures position at a specified price.
Simulated trading will begin on the ShFE on May 21, according to a notice on the bourse’s website. It will run concurrently with the ShFE’s daytime trading hours until June 22, but there will be no night session. No timeframe has been set for the contract to launch for real, but participants expect it before year-end.
The options have been touted as a way for Chinese metal firms to manage their price exposure.
Traders from units of China Minmetals Corp [CHMIN.UL] and Jiangxi Copper, two of China’s biggest state-run metals firms, said they would participate in the trial. A trader from international trading house Trafigura said his company would also take part. The traders declined to be identified as they were not authorized to speak with media.
He Jinbi, chairman and CEO of Maike Metals Group, told Reuters on the sidelines of the LME Asia Week conference in Hong Kong that his company would not participate in the trial but that its brokerage subsidiary, Maike Futures, would.
The listed options contracts for the simulation will run from June 2018 to May 2019. But Guy Wolf, global head of market analytics at brokerage Marex Spectron, was skeptical about the project’s chances given that the “vast majority of liquidity” on the ShFE is in the front-month copper contract.
“You cannot create a liquid options market around an illiquid future,” he said.
ShFE did not immediately respond to requests for comment on potential liquidity.
In a bid to encourage companies to step up and play the role of market makers, the exchange said it would hand out rewards to participants, including two ‘first prizes’ based on the number of active accounts, average transaction volumes and positions. It did not say what those prizes would be.
Market sources said they expected the ShFE to look for market makers for when the contract is up and running, but will probably only take Chinese companies linked to state-owned enterprises or top-tier China brokers rather than any overseas firms.
Meanwhile, traders at the industry event in Hong Kong said it was unlikely that Shanghai copper futures would be opened up to international investors in 2018.
Reporting by Melanie Burton and Tom Daly; Editing by Christian Schmollinger and Joseph Radford